Siemens-Alstom train wreck offers down-to-earth tips for merger hopefuls
26 March 2019. By James Pressley and Natalie McNelis.
In vetoing Siemens' buyout of Alstom's rail business, the European Commission unleashed a political thunderstorm that continues to rumble across the EU. But the prohibition also offers down-to-earth lessons for executives contemplating mergers that need clearance in Brussels.
A full appraisal of the landmark case will become possible only after the commission publishes its formal decision on the Franco-German rail merger. In the meantime, however, a clear outline of what caused the train wreck is emerging from background briefings.
Here are seven tips for merger partners based on details that have surfaced so far.
1) Think hard about assets you don’t want to sacrifice.
When you've worked out what they are, imagine having to sell them to win EU approval.
The deepest concerns of commission case handlers about the Siemens-Alstom deal hinged on just two product lines. One involved very-high-speed trains, which hurtle along at 300 kilometers an hour or more.
The obvious divestment would have been Alstom’s Train à Grande Vitesse, the TGV, which has a standalone production site, assets, personnel and an order backlog. The Siemens Velaro, by contrast, is built alongside other trains, trams and locomotives, making it trickier to split off. Nor does the Velaro have an order pipeline, making it less attractive to a prospective buyer.
But the French weren’t about to give up the TGV, a symbol of national pride. If that kind of sacrifice seems unthinkable, perhaps your deal should never get out of the boardroom, to paraphrase former US antitrust boss Bill Baer.
2) Months of prenotification talks don’t guarantee a smooth ride.
Merging companies increasingly engage in lengthy talks with the commission before filing their deals. These talks sometimes allow the two sides to begin hashing out “remedies” such as asset sales before the clock starts on an initial four-week review.
For Siemens and Alstom, prenotification talks began some eight months before the filing in early June 2018. That means the discussions started around the time an initial memorandum of understanding was announced, but well before the signing of a business combination agreement in March 2018.
While advance talks can lay the groundwork, EU investigators can do only so much before opening a formal review. They may sound out the market, but won’t begin closely quizzing rivals, suppliers and customers until after the deal lands on their desks. Strong opposition might emerge only then.
Whatever Siemens did during the prenotification talks, it failed to prevent a mad dash of last-minute remedy offers, revisions and escalating political hyperbole.
3) Explain how your deal will benefit competition and consumers.
Although EU rules don’t require merger partners to spur competition, it never hurts to explain how your transaction will boost innovation or lower prices.
Throughout the investigation, commission officials struggled to grasp the procompetitive rationale for the Siemens-Alstom deal. They even wondered how the merger would make the companies more competitive on the world stage, given that the two were already global leaders.
Balanced against this, the commission received sharp warnings from customers and four national regulators, who said the proposed remedies were fatally flawed.
The only procompetitive argument Siemens and Alstom put forward was that the deal was needed to fend off a pending invasion from a state-backed Chinese behemoth.
4) If you play the China card, your arguments had better be good.
Sounding an alarm about the Chinese dragon can play well politically, but the warning may make case handlers shrug — unless you present firm evidence that Chinese rivals represent a clear and present danger.
That was the case with Siemens and Alstom. They raised the specter of competition from China’s mammoth rolling-stock maker CRRC, saying its revenue, at about $30 billion a year, was twice that of Siemens and Alstom combined.
But regulators wanted to see evidence of competition in the market today — not in 10 years' time. Although CRRC is present in Europe, it’s at the lower end of the market, where it sells basic freight, passenger and shunting locomotives, EU officials say.
Siemens could point to only one example of CRRC staking a claim to the high end of the market — through a train contract in the Czech Republic.
5) Gather data sooner rather than later, and beware venomous internal documents.
The commission routinely asks merger partners to produce voluminous amounts of data and internal documents. Last year, submissions during in-depth probes swelled to more than 450,000 documents, up from an average of fewer than 100,000 during the five years up to 2017, according to law firm Freshfields Bruckhaus Deringer.
The sheer volume of documents requested during the Siemens-Alstom review appears to have overwhelmed the companies, even during the late stages of the investigation. The challenge was acute when it came to collecting data on bids placed during past tenders. Many of those datasets were unavailable electronically and had to be gathered manually.
E-mails, memos and other internal communications have become central to EU merger probes. In this case, they bolstered the commission’s findings, especially when some documents pooh-poohed the alleged Chinese threat, MLex learned.
Companies, take note: You should start gathering information — and vetting it — early.
6) Don’t offer complicated remedies late in the game.
If you do, you’ll just annoy EU officials and narrow your room for maneuver.
From the moment Siemens filed the rail deal in Brussels, it was clear it would need to offer concessions — and that they would be complex.
Siemens could have made an offer during the phase I review, but it kept mum. The buyer could have proposed a remedy early in phase II but didn’t. Instead, Siemens waited until day 65 of the review — the final deadline for submitting remedies — to make an offer.
Waiting so late to propose a complex offer that would almost certainly require modification was a risky move. The tactic left little time for the back-and-forth needed to hammer out a complicated package of concessions.
A market backlash erupted almost immediately. Yet Siemens waited weeks before modifying its offer, on about day 110.
If the companies were playing a game of chicken, they lost. Although the commission didn’t slam the door in their faces, the timing proved problematic. Even if the commission had been disposed to accept the proposal, it was obliged to consult the market and national representatives. That exercise takes time.
Ultimately, the revised offer proved too little too late. If the two sides really did come “very close” to an agreement, as reported, a little more breathing room might have worked wonders.
7) Political pressure may spoil your nest.
For companies as powerful as Siemens, it may be difficult to imagine Eurocrats blocking the way. The backing of the mighty German and French governments would seal the deal, surely?
But the political noise surrounding the Siemens-Alstom debacle seems to have done more harm than good. If anything, it hardened the regulator’s resolve.
The glare of media attention restricted the flexibility of commission officials, forcing them to guard against any semblance of improper influence. Like Caesar’s wife, they had to be above suspicion.
The threat of judicial review left them little choice. They had to be “technically right,” to borrow from a bitter tweet by Siemens’ chief executive officer, Joe Kaeser.
The Siemens-Alstom veto has triggered a debate at the highest political levels about the EU’s antitrust regime, with France and Germany pressing to revise the rules to address the challenges of a globalized economy and new technologies.
EU heads of state and government agreed last week to “continue to update” the rules in line with global developments, alluding to the growing power of Chinese state-backed companies.
Any revamp is likely to take months, if not years, of arduous negotiations. For now, merger partners would be wise to ignore the Sturm und Drang and get on with finding paths for their deals to be cleared under the current rules.