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Transportation’s break-up scenarios
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GE Transportation’s break-up scenarios
Trains Industry Newsletter
ERIE, Pa. — GE Transportation will soon be sold or partnered away from the parent company. Wall Street analysts even seem to notice, along with historians, that the move brings an end to one of GE’s oldest businesses. But what may happen next? What follows is Trains News Wire’s informed speculation about the possibilities.
Complete shut down
Yep, GE could sell all of the business assets Gordon Gekko-style, with Building 10 in Lawrence Park, Pa., becoming a giant indoor zip line course. Why? Because they can.
PROS: [Crickets chirping.]
CONS: The locomotive (and heavy duty machine) market is at the bottom of its business current cycle, so a sale would bring the lowest possible prices on physical assets. One unanswered question is which company will hold all the patents that GE Transportation workers have racked up over the years. If patents and intellectual property remain with the core of GE Corp., then liquidation is even less likely because the patents may have as much or more value than land or buildings in this technology-driven machine age.
If Alstom and Siemens can merge, why not Alstom, Siemens, and GE?
PROS: French and German officials from both the European companies say they want to better compete with China’s CRRC — already the world’s largest railroad builder and supplier. And GE Transportation would fill a niche that neither company has: heavy-haul diesel electric locomotives. Plus Siemens and Alstom have as good or better connections than GE in emerging markets such as Africa, the Middle East, and Asia — and especially in passenger rail where GE has lagged for years.
CONS: Politics. The Siemens-Alstom merger is under review by European Union regulators now and it’s hard to imagine stalling talks to include a huge American partner. Plus GE Transportation makes mining equipment and gear boxes in addition to locomotives while Alstom-Siemens would be focused on rail. Also remember that U.S. politicians will be keen to keep jobs in Pennsylvania and Texas and ownership in the U.S. as a matter of pride and votes.
GE-Alstom or GE-Siemens
OK. So maybe there is something GE could offer Siemens or Alstom that would make it a better choice. It would be a double-cross to call off the Siemens-Alstom merger, but it’s nothing personal, just business — right?
PROS: Siemens and Alstom lack market share in heavy-duty diesel electric locomotives. So a merger with GE makes either instantly competitive in heavy haul freight applications going head-to-head with China.
CONS: Politics again. Breaking up a Siemens-Alstom merger would show disunity in Europe at a time when French and German politicians want to show only unity. The proposed merger is almost a corporate metaphor harkening back to the French-German coal and steel community of the 1950s that helped bring prosperity to western Europe after World War II.
Aw, heck. Just let the two American locomotive manufacturers merge and get it over with.
PROS: This makes total sense from a manufacturer’s standpoint. A Caterpillar-owned GE-EMD would corner the heavy-haul market worldwide. The company could select and use the technologies that work best and deploy them: GE, EMD, or Caterpillar. The company would be based in the U.S. with mostly North American suppliers. Cutting the total number of jobs would also likely bring more stability for remaining workers and more certainty of work for suppliers. A combined company might even make better products than ever.
CONS: Can you say Sherman Anti-Trust Act? GE-EMD would be not just a U.S., but a worldwide monopoly for heavy-duty diesel-electric freight locomotives. If you think that that is too narrow a category, consider when was the last time you saw a Chinese, French, or German locomotive hauling 3-mile-long coal, double-stack, or grain trains. Never, you say? Case closed.
GE-Kumatsu, GE-John Deere, or GE-Cummins
Think about it, GE Transportation is not merely a railroad supplier, it is a heavy-duty machine manufacturer. Their products happen to roll on rails as well as rural mountain roads. Engines from Grove City, Pa., can propel ocean-going vessels too. Pick a heavy machine manufacturer, or an engine maker, and sail it off into the sunset with GE Transportation.
PROS: If you are a heavy equipment maker, you compete with Caterpillar. Adding GE Transportation gives you added heft and diversity to do the job. And overall branding could be a bonus to certain customers who could plow fields and harvest corn with the same company that will haul the crop to market and power the barge that delivers it overseas. (Think of the financing deal for a farming cooperative-owned short line!)
CONS: The rail assets get lost in these kinds of transactions. Locomotives are a big part of what GE Transportation does but would mean little to Cummins, which already has other locomotive makers (Siemens) as customers. Oh, and while locomotives are in a downturn, so is agriculture and mining. Any company looking to make this move would have to have lots of cash and care little about short term pestering from Wall Street. AND, the customers are much different. CaseIH, for instance, will sell fleets to corporate customers, as well as a one-off tractor to the family farm down the road. The only companies that want or need locomotives are railroads or companies that serve railroads.
Notice how I flipped GE’s position in the subhead? Berkshire Hathaway, the famed corporate child of even more famous investor Warren Buffet, could likely buy GE Transportation with cash or stock without blinking an eye. Why, it could even be a division of BNSF Railway, railfans rejoice!
PROS: Berkshire-owned BNSF Railway could have a steady source of locomotives forever, and the cross-pollination of talent between manufacturing and operations are obvious. GE’s stock is already being pummeled by investors making the GE parent company and all its components significantly undervalued for the long-haul, making them more ripe for a value investor, such as Buffet, who has an affinity for good companies with low self esteem. Say what you will, railroads will need new locomotives again someday.
CONS: The opposite problem of John Deere applies here: the other stuff GE does just won’t matter very much and doesn’t fit neatly into Berkshire’s existing portfolio. AND, the locomotive business is cyclical, something that Buffet has steered away from in the past. All in all, this is more a fantasy than anything.
OK, if every possible combination or outright sale seems like it has significant downsides, does anything have a big positive? Yes. GE could surgically split GE Transportation into component parts that are much more attractive for sale. This would work as long as the appropriate patents and intellectual property go with each piece.
PROS: Remember American Locomotive Co.? It could return with a reinvigorated locomotive division that is free to make a go of it alone with the right investor or merge with foreign railroad suppliers (hint, hint, Bombardier), U.S. freight car manufacturers, or a bank that wants to produce and lease locomotives. Heavy machine makers can take the pieces that make gear boxes and someone else can take diesel engines, and GE Corp. gets the cash.
CONS: This precision tinkering takes time. GE Corp. officials say they want to make deals within the next year or two. That means that they would have to already be in negotiations with potential buyers and know the markets pretty well so they can make alignments and transitions as smooth as possible. Even the best, most talented executives can fail at this, so asking GE to make several such transactions in a short time is asking a lot.
Spin-off a new company for existing shareholders to own. Call it — Great Lakes Big Machines.
PROS: Well, that would be easiest for GE Corporate officers. They can wash their hands of the whole thing and then the market will decide what happens if Great Lakes sinks or swims.
CONS: We don’t know the financials. GE’s 2016 annual report says the division made $1.1 billion in profit on $4.7 billion in sales — which is really profitable. But, um, may I see a full financial statement for the division, and not just pretty overview charts? What portion of GE Transportation’s profitability is because GE is GE and has deals around the world and locomotives were part of the package? Only a select few inside the company know the answer. And then we get back to the question about intellectual property. More than half — $2.4 billion — of GE Transportation’s 2016 sales came from services, according to the annual report. More and more software today, including some of the software GE installs in locomotives worldwide, is known as SaaS — or software-as-a-service. Much of that software is already tied to GE Digital, a different division. So in a spin-off to shareholders, who owns the right to revenue on the software? The answer makes all the difference in the world.