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Will the merger between Bombardier and Alstom ultimately get derailed?

Following the European Commission’s decision to block Alstom’s merger with Siemens train division last year to prevent a monopoly and possible price increases, Canada’s Bombardier has been exploring potential merger with Alstom in recent weeks. But even with an offer on the table a number of factors could ultimately derail the merger.

Last year’s failed merger has been a blessing for Bombardier because it would have created a competitor twice their size. In addition, it would made it more difficult for Bombardier to compete in Europe because both Siemens and Alstom have a high market share in high-speed trains and signaling systems.

The timing of the recent merger talks comes right as the high-speed rail market is expected to increase by 5,604 units over the next 4 years at a CAGR of 5.8%, according to Market Research Engine. This growth is driven by energy-efficient operations and global urbanization which is providing governments an option to expand their modes of transit.

This creates a significant opportunity for organizations who can position themselves to capitalize on the favorable environment for rail, and if the merger happens both companies will benefit from:

• Cost reduction through scale
• Sharing of technologies
• Cross-selling of products
• Increased market share

A merger would help the two companies not only reduce costs through scale, but also to cross-leverage each other’s technologies to gain ground on competitors, including the market dominant CRRC, the Chinese state-owned company. Furthermore, the combined organization could leverage their global presence to increase sales of their combined product portfolio.

While Bombardier is a Canadian company and would face less anti-trust scrutiny from EU regulators, one of the biggest complications to the merger may be national pride, which plays a prominent role in cross-border business negotiations within the French culture. Some of the other complicating factors could include:

•  Rail revenues of both parties are almost equal ($9B USD)
•  Both have strong unions
•  Organizational culture alignment

Pursuing a merger of the two companies makes good sense as consolidation is inevitable to compete against the Chinese globally. However, I highly recommend that both Bombardier and Alstom explore synergies in their current management operating system so that they can design their future state management operating system before they consolidate.

In November 2019, the Alstom and Bombardier consortium was awarded the contract to design and manufacture 44 new generation metro trains for a sum of over 530 million euros for Île-de-France Mobilités and RATP. It’s possible they can use this contract as a pilot for their future state.

While chances are increasing, only time will tell if the merger will occur. One thing that is certain, the merger would have a significant impact throughout the global high-speed rail industry. Share your perspective on the potential merger in the comment section below. Moreover, if you are evaluating a potential merger of your own or seeking to design your future management operating system, contact me at jrattanakhom@proudfoot.com or +1 404 358 5326

Posted on February 14, 2020

By Proudfoot Team

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