Alstom has announced with Siemens a reserved capital increase that will give Siemens 50% control. No public tender offer will be required, since the price is 13% above the last stock market price.
Although there had been rumours, surprise surprise, Serge Tchuruk and Patrick Kron had always refused such an alliance when the Alstom Group was doing much better... The announcement of the sale of the railway business to Siemens comes just as one of the executives for the Asia region, Frederic Pierucci, previously indicted and imprisoned in the US, has been sentenced to 30 months in prison, without this happening to other directors.
It is true that Alstom’s directors successfully managed to sell the power and grids business to General Electric when there was a strong suspicion that they would be indicted in the US for bribery. A few years ago, we warned Alstom’s general management of the risks associated with investigations into bribery, particularly on certain emerging markets, warnings that were dismissed by Patrick Kron, who did not acknowledge these facts...
Paradoxically, Mediapart’s revelations about the family links between one of the heads of the US law firm that defended Alstom and the CEO of General Electric did not call the operation into question, necessary as it was “for the survival of Alstom and jobs in France”...
Two days before the Alstom shareholders’ meeting, during which the shareholders voted on the sale of this business to General Electric, it was specified that the fine of USD 772 million would be paid by Alstom and not by General Electric, with a deduction of this amount from Alstom’s equity in the rail sector. For all that, the shareholders’ meeting went ahead, even though most all the shareholders had voted before this announcement.
At the time, the board of directors, the directors of Alstom and notably its CEO Henri Poupart-Lafarge (son of the former finance director of Bouygues, an Alstom shareholder) argued that specialisation in the railway business sector was a necessity and that Alstom could grow alone, given its order backlog and expertise... How can we analyse this strategic error, which numerous analysts (including Phitrust) identified? Or rather, how can the succession of events that led to all Alstom’s activities being sold to foreign competitors be interpreted?
First of all, Serge Tchuruk’s desire to develop a “fab-less” company prompted him at the beginning of the 2000s to sell a real nugget (submarine cables, which became Nexans), then to separate Alcatel’s business from that of Alsth0om, because, according to analysts, conglomerates were under-valued.
Fears of a hefty fine following bribery scandals and the possible indictment of Alstom directors probably led to the sale of the power and grids business to General Electric, especially as this came at the same time as the staggering fine imposed on BNP Paribas. This decision was taken without any true consideration of the highly fragile nature of the railways division, a cyclical industry that is highly dependent on public procurement. Unfortunately, what happened next was what necessarily happens to an industrial model based on only one business that no longer has the resources to make its presence felt, particularly in the face of Chinese competition (to which the technology had been sold a few years before, without thinking that these customers would one day become competitors...).
The shareholders now only have two choices in response to the proposal that has been made to them:
This operation will lead to industrial restructuring and job losses... because the two companies, Siemens and Alstom,will be unable to keep their different production facilities and technologies unchanged. It would be strange, to say the least, if the former directors were not answerable for the decisions that led to the sale of all activities to competitors. Especially since during the period when they managed the company, their variable remuneration was substantial following the economic and financial performance, not to mention their severance packages (more than €4 million for Patrick Kron) and top-up pensions paid for by the company...
Today, investors talk about responsible investment, and it is high time they acted together to hold to account the directors that implemented these strategies, destroying value and threatening the future of the companies they managed. This is true for Alstom today, but it is equally true for other companies that we can recall all too easily.
Have you talked about Responsible Investment?
Although there had been rumours, surprise surprise, Serge Tchuruk and Patrick Kron had always refused such an alliance when the Alstom Group was doing much better... The announcement of the sale of the railway business to Siemens comes just as one of the executives for the Asia region, Frederic Pierucci, previously indicted and imprisoned in the US, has been sentenced to 30 months in prison, without this happening to other directors.
It is true that Alstom’s directors successfully managed to sell the power and grids business to General Electric when there was a strong suspicion that they would be indicted in the US for bribery. A few years ago, we warned Alstom’s general management of the risks associated with investigations into bribery, particularly on certain emerging markets, warnings that were dismissed by Patrick Kron, who did not acknowledge these facts...
Paradoxically, Mediapart’s revelations about the family links between one of the heads of the US law firm that defended Alstom and the CEO of General Electric did not call the operation into question, necessary as it was “for the survival of Alstom and jobs in France”...
Two days before the Alstom shareholders’ meeting, during which the shareholders voted on the sale of this business to General Electric, it was specified that the fine of USD 772 million would be paid by Alstom and not by General Electric, with a deduction of this amount from Alstom’s equity in the rail sector. For all that, the shareholders’ meeting went ahead, even though most all the shareholders had voted before this announcement.
At the time, the board of directors, the directors of Alstom and notably its CEO Henri Poupart-Lafarge (son of the former finance director of Bouygues, an Alstom shareholder) argued that specialisation in the railway business sector was a necessity and that Alstom could grow alone, given its order backlog and expertise... How can we analyse this strategic error, which numerous analysts (including Phitrust) identified? Or rather, how can the succession of events that led to all Alstom’s activities being sold to foreign competitors be interpreted?
First of all, Serge Tchuruk’s desire to develop a “fab-less” company prompted him at the beginning of the 2000s to sell a real nugget (submarine cables, which became Nexans), then to separate Alcatel’s business from that of Alsth0om, because, according to analysts, conglomerates were under-valued.
Fears of a hefty fine following bribery scandals and the possible indictment of Alstom directors probably led to the sale of the power and grids business to General Electric, especially as this came at the same time as the staggering fine imposed on BNP Paribas. This decision was taken without any true consideration of the highly fragile nature of the railways division, a cyclical industry that is highly dependent on public procurement. Unfortunately, what happened next was what necessarily happens to an industrial model based on only one business that no longer has the resources to make its presence felt, particularly in the face of Chinese competition (to which the technology had been sold a few years before, without thinking that these customers would one day become competitors...).
The shareholders now only have two choices in response to the proposal that has been made to them:
- to accept or reject the proposed transaction: the directors and the state (indispensable as the ordering client) believe that there is no other means of preserving industrial capacity in France and that a European solution is preferable to any other. But the price of the transaction (+13%/ stock market price) is way below that seen in mergers that have offered premiums of 30% or 50% above the market price, representing a loss of earnings of €800 million for existing shareholders, taking the proposed dilution into account.
- to seek accountability for this strategic debacle and the sale of the power and grids business to General Electric at a price €800 million below that announced to the shareholders prior to the transaction being concluded.
This operation will lead to industrial restructuring and job losses... because the two companies, Siemens and Alstom,will be unable to keep their different production facilities and technologies unchanged. It would be strange, to say the least, if the former directors were not answerable for the decisions that led to the sale of all activities to competitors. Especially since during the period when they managed the company, their variable remuneration was substantial following the economic and financial performance, not to mention their severance packages (more than €4 million for Patrick Kron) and top-up pensions paid for by the company...
Today, investors talk about responsible investment, and it is high time they acted together to hold to account the directors that implemented these strategies, destroying value and threatening the future of the companies they managed. This is true for Alstom today, but it is equally true for other companies that we can recall all too easily.
Have you talked about Responsible Investment?
Olivier de Guerre
Phitrust
