General Electric Taking Over Jenbacher

THE GE / JENBACHER CASE

Final Paper

International Mergers and Acquisitions (0926)

Florian Kцller 0251208

The purpose of this paper is to discuss the strategic rationale and the possible implications for General Electric (GE) when taking over the Austrian turbine producer Jenbacher. For a better breakdown of the different aspects of this issue the paper is subdivided into the following sections:

* Business rationale

* Logistical aspects

* And legal implications

1. Business rationale

Jenbacher Aktiengesellschaft is an Austrian company, headquartered in Jenbach in the region of Tyrol. Jenbacher is a leading manufacturer of gas reciprocating engines and generator sets for power generation applications ranging up to 3 megawatts. Besides the company is known for its innovative capabilities in the sector of cogeneration and the utilization of biogas and waste gases.

Therefore an acquisition of Jenbacher would enable General Electric to gain the position of a market leader in this field while incorporating the know-how in order to retain the competitive advantage. Here are the most important business implications:

Jenbacher would be integrated with GE distributed power, a unit of GE Power Systems. As a typical conglomerate GE has all the necessary expertise to integrate a company like Jenbacher, particularly since they are operating in a field of the industry, where GE is still lacking a leadership position. Therefore the overlap in the business itself is rather low whereas the strategic fit is significant. The synergies created through this acquisition would be mostly in terms of economies of scale and scope. While Jenbacher offers GE the opportunity of gaining a leading position in this sub segment of the industry of power generation with reciprocating engines, GE improves Jenbacher's growth opportunities through its market expertise, distribution network and easy access to capital. The increased market power of the combined companies enables Jenbacher to negotiate better deals with their suppliers on a global basis. Jenbacher could ultimately become a center of excellence since its employees have already proved their ability to stay on top of industry innovations.

Since GE is a strategic investor, concerns of job losses or a closedown of the Austrian facilities should be rather low. GE rather provides the security of a big network and the possibility of future growth, creating employment and wealth for the region.

An acquisition of Jenbacher would basically be based upon an existing distribution agreement of GE Power Systems as Jenbacher's exclusive distributor for the Americas for most applications and on a non-exclusive basis in other parts of the world. For this reason GE already has an excellent relationship with the management and the majority owners of Jenbacher. They need to be approached beforehand since they hold a total of round 56% of the share capital and their prior consent to go ahead is therefore absolutely vital for the success of the acquisition.

After investigating the business rationale behind the deal, a closer look at the practical implications shall be taken. As can be seen from the figure below, Jenbacher's stock price has only been recovering in the first quarters of 2002 to re-reach the highs of the year 2000. (The assumption is made that the data of the first two quarters of 2002 is the most recent available at the time) Unfortunately for Jenbacher, this development is not backed up with key financial data:

Figure 1: Jenbacher's stock price in relation to the ATX over the last 18 months

Figure 2: Key financial data of Jenbacher

Source of both figures: Jenbacher AktionÐ'rsbrief 1.Halbjahr 2002

Even though the figures show a slight increase in turnover, both EBIT and EBITDA are significantly lower in comparison to the same period in 2001. According to Jenbacher representatives the reasons for this are increasing costs of market penetration and an unfavorable current development of the US market (Enron).

As a consequence, it can be assumed that the stock price will not rise significantly for the rest of 2002, as the analysts have not been all too impressed with the figures shown. This is increasing the probability of a successful public offering, as Jenbacher's shareholders will presumably be happy to sell their stock at a reasonable acquisition premium while the acquisition price will not be pushed up through the stock market before the public offering is made. Experience has it, that the stock price will move up as soon as the intention to make a public offering is announced. To sum up, the timing for an acquisition seems to be appropriate.

In order to gain full control over the company and it's know how, the target can only be to buy a majority of over 90%, then squeeze out remaining shareholders and ultimately delist Jenbacher. In very general terms, an alternative to acquiring a company is always to establish a new company to develop the expertise on our own. This is unfavorable for the following reasons:

* It would take considerable resources and time to develop the necessary expertise in this field

* Most importantly, if GE entered this market it would become a competitor of Jenbacher and others, thus leading to decreasing margins, making the market overall less profitable and attractive.

2. Logistical aspects

After knowing the business rationale for a possible acquisition of Jenbacher AG, the logistical process of this acquisition shall be examined in order to help establishing a business process timeline for this acquisition. The general breakdown of this process is:

* Initial contact

* Due diligence phase

* SPA negotiation phase

* Public tender offer phase

* Squeeze out and delisting

2.1. Initial contact

As