At Zenify Investments, we often advise our clients to approach auctions or competitive bidding situations with extreme caution. Why? Let us share a story about GE's acquisition of Alstom Power to explain why.
The Costly Acquisition
In 2015, GE made headlines with its $10.6 billion acquisition of Alstom Power, marking its largest industrial acquisition to date. However, this ambitious deal has since been labeled one of GE’s biggest strategic missteps. So, what went wrong? And how does this tie into the risks of competitive bidding?
The "Competitive Premium"
In auction situations, you almost always pay more to get on top of other bidders. Almost. Always. Paying. More. This extra cost isn't because the business suddenly became more valuable - it's simply the price of outbidding the competition. I call this the "competitive premium."
Think about it this way: if a business's true value is X, in a bidding war you might end up paying X plus, say, 50% just to eliminate other bidders from the game. That extra 50% doesn't represent additional value that the business brings about - it's purely the cost of winning.
You might say, "What's wrong with that? If you really want the asset, you have to pay extra to secure it."
The Psychological Shift
Here's where it gets dangerous: your psychology during these moments fundamentally shifts. Instead of keeping your eyes close on risks, you become distracted on finding justifications for the rising prices. Team discussions change from "Are we absolutely sure we know all the risks with this business and that we are certain about our assessments?" to "How much do we need to increase our bid to win this deal?"
In GE's case, they were competing against Siemens and clearly wanted the deal. GE had estimated $3 billion in cost savings from the merger. Let's assume the true value of Alstom Power were $7.6 billion. In a non-competitive bidding situation, you could buy the company for $7.6 billion, give or take. But in a competitive situation, the buyer would pay $7.6 billion plus up to $3 billion (the synergies, some call it "strategic value" - in GE's case, the cost savings), resulting in the total price of $10.6 billion that GE ultimately paid for Alstom Power.
Cultural Mismatch = The Integration Nightmare
Did those promised $3 billion in cost savings materialise? Not even close. The integration of Alstom Power into GE's business became a nightmare, primarily due to a factor that often gets overlooked in the heat of bidding: cultural differences.
I recently read a fascinating account by Trường Phan Văn, former deputy CEO of Alstom Group, who worked directly under Jean-Pierre DeGeorges, Alstom's chairman from 1981 to 1991. In chapter 3 of his book, "Mot Doi Quan Tri," he described Jean-Pierre's leadership style, which focused on empowerment, employee motivation, and collaboration. These very values defined the culture at Alstom Power. GE's management style, in contrast, emphasises directness, KPI monitoring, and performance targets.
Imagine being an Alstom employee suddenly thrust into GE's tightly managed, performance-driven environment. The clash in values, expectations, and communication styles would have been inevitable, which likely explained the integration failure and why those promised cost savings never materialised.
Overlooking the Market Shift
The second disaster stemmed directly from the competitive bidding mindset. In their eagerness to justify the higher price, GE failed to adequately assess market risks. They based their valuation on expectations of increasing gas turbine demand. Instead, consumer preferences shifted dramatically toward renewable energy and energy-efficient solutions, causing the gas turbine market to collapse.
This oversight proved catastrophic for GE, particularly after doubling down on a business that would soon fall out of favor. The result? Billions in write-downs and significant destruction of shareholder value.
The Takeaway
Competitive bidding situations don't just make you pay more - they fundamentally alter your decision-making process. Instead of maintaining a healthy skepticism, you find yourself caught up in justifying higher prices and winning at all costs. This psychological shift can lead to devastating long-term consequences.
The GE-Alstom story serves as a powerful reminder that winning a bid might feel like victory in the moment, but it can lead to massive value destruction if competitive pressure clouds your judgment and causes you to overlook fundamental risks.
This analysis is part of our ongoing series examining key lessons from major M&A transactions. For more insights on investment strategy and value creation, visit our Blog or contact our team.
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