The industrial world noticed last week when ABB Ltd. announced its $2.6 billion purchase of General Electric Co.’s Industrial Solutions business. The decision to sell confirmed that GE will change under new CEO John Flannery. The decision to buy cemented ABB as a major player in the North American industry.
CEO Ulrich Spiesshofer described the unit as an “unloved child” and said, “We know what needs to be fixed. We are very confident this business will prosper as part of ABB.” If they do, the bottom line will benefit: ABB will incur costs of about $400 million over five years to integrate the business, but it could eventually generate annual cost savings of about $200 million.
The deal could also spark ABB in its chase of global electrification leader Schneider Electric. Nobody in the company has publicly stated that as a goal right now — better now, bigger later, they say — but wait three or four years and the results might speak for themselves.
IndustryWeek talked with Tarak Mehta, president of the Electrification Products division of ABB and a member of the group executive committee, not long after the deal entered the news. He shared some information about the process, the future and where other industrial companies might glean some best practices.
IndustryWeek: Congratulations on this deal. In this euphoric aftermath, what is the biggest takeaway for you?
Tarak Mehta: I think the real takeaway is the commitment of ABB to the North American market, and also to this segment of the portfolio of ABB. We’ve now made significant investments to this part of the portfolio — you remember (the 2012 acquisition of) Thomas & Betts, which was also a ($3.9) billion dollar investment — and with GE Industrial Solutions, we’re building on that investment. The focus is, this is a core part of ABB. The board and the team feel this is where we want to invest. … And for the North American market, we are now a Tier 1 supplier and partner for the distribution channel in the United States and Canada. That’s the highlight of why we’re doing this.
IW: And what is the long-term goal with this move?
TM: It’s not only a North American move. It’s a complement to the portfolio. The fact we can create to the scale that we have, we can unlock significant potential in this business, that’s how we see it, and on top of all that, we believe we can strengthen GE’s Industrial Solutions business through the complementary technology we have.
IW: If we look at the profit margins of GE Industrial Solutions, they’re a little lower than what you’re used to, right around 8% last year. You said in another interview you thought they could maybe double to 15%, 20% within the next three years.
TM: If you ask, ‘How are we going to do this?’ this process will take a significant amount of time. It won’t happen overnight. We have to address the product portfolio and the technology harmonization, and that takes time. There is an optimization on the supply side of how we serve the market. We say it will take us up to five years to get this business to appear at the profitability level, not three years. We want to do it right. We have a full understanding of the challenges and how much effort it takes to get this kind of performance up. In our industry, which is fairly conservative, it’s going to take time from a product lifecycle replacement to incorporate new solutions we’ll bring to the market.
We also are planning to invest quite a bit into the business, to make it better first, then bigger. It’s going to take time and significant investment.
IW: What advice, what best practices can you pass along, now having gone through this process over the better part of the last year?
TM: Looking at our integration, the way we characterize this addition to the family is integrating a known core business into a No. 2 player. It’s a powerful combination of complementary businesses that will shape the global leadership in electrification with a comprehensive U.S. portfolio. … A key part is to retain the management, in engineering and in sales. The proximity, the relationships with the customers, the trusted brand are all key parts of the value proposition. Business is all about people, and any deal we’ve been part of, retaining the key people, making sure that are part of the future is a key component to success. And, of course, when you acquire a brand as strong as GE, we need to do a good job to make sure the deep customer relationships are maintained and become stronger.
From a philosophical level, you have to walk in saying, ‘Look, neither of the two organizations is best. Let’s have an objective process of evaluation of what we like about the GE Industrial Solutions business and what they like about the ABB electrification products, and let’s take the best of both worlds.’ If you do that, you have commitment and joint energy. In this case, these are the success criteria: a clear view of what we’re doing, a clear objective of what we want to get to — whether that’s numbers, performance, people — and how we are going to work together. These are the three foundational elements.
IW: You mentioned that keeping people and maintaining continuity was an important part of all this. In a business that is, as you said, rather conservative, I imagine that was a key requirement as you were going through the last year, making sure everybody stayed on after the acquisition.
TM: When we looked at the people as part of the due diligence, we spent quite a bit of time, we visited almost every location to understand what the business has. In the process, we met many of the people and we came away with a clear understanding of where the challenges are in the business and the strengths of this business are. … It’s really in product and technology where we can support it.
Our perspective is that this is a business that has been underinvested in for a long time. The people and the teams that have run it have done a bang-up job to keep it at its level of performance. When we give it support, investment, technology, encouragement, this business will turn around.
IW: The GE brand still has a certain power. Being associated with them, having them under the ABB umbrella, has to be a great feeling, and a pretty great get, as well.
TM: There are quite a few value drivers in this relationship. One is their willingness to allow us to use a valuable brand, continue to support, to develop this transition to ABB over a sustained period of time. The second is the supplier relationship. We’ll have a preferred supplier relationship with GE to supply — and not only Industrial Solutions, but also the greater ABB portfolio. GE has been quite gracious and willing to put ABB in a preferred supplier construct and relationship. … Those are other elements of the value beyond product portfolio and people.
IW: As you continue to chase down Schneider Electric for that top spot — and maybe this will be the move that pushes you there — do you think there will be more acquisitions to come? ABB has spent about $11 billion on acquisitions over the last decade already, which is rather aggressive.
TM: We want to first close this deal, and we’re not there yet. Our goal for the next few years is to make this business stronger first. We haven’t factored significant revenue growth for the first few years because we need to get better first, stronger, and then the goal is to get better. We are still some distance away from Schneider, so our goal very much on the customer side, innovation side, technology side — not necessarily to be No. 1 purely from a revenue point of view, but really in performance to shareholders and customers. That’s our main goal.
In that process, if we get to No. 1, that’d be great. But this solidifies our No. 2 position. In five years, you may very well be right, but at this point, given this big move, we need to deliver on this before we look for anything else sizeable.
IW: This deal is expected to be finished some time in the second half of next year. You’re looking at three or four quarters to get this finalized?
TM: If you could estimate when the regulatory process would conclude, you could have a very profitable consulting organization. Unfortunately, it will take the time that the regulatory authorities want. We don’t expect it (to drag), but it’s really difficult to estimate exactly when it will wrap up. That depends on the regulatory authorities.