What's going on?

Europe is on the cusp of creating a giant train company! According to various media reports, a merger between French high-speed rail company Alstom and the rail division of German conglomerate Siemens is likely to be announced very soon.

What does this mean?

On Friday, Alstom confirmed it was in talks with Siemens about a potential merger. Siemens had been discussing a deal with Canada�s Bombardier, but those talks fell apart and a tie-up with Alstom now appears to be the plan. The deal is expected to give Siemens a majority ownership of a new combined company that will own both Siemens� rail division and Alstom as a whole.

On Monday, reports surfaced that the French government had backed the deal � a controversial point given that a German company will have a lot of influence over a big (soon to be formerly) French one.

 

Why should I care?

The bigger picture: This European giant should be able to better compete with China�s behemoth.


The 2015 merger of two rail companies in China created a big global player � CRRC � which greatly benefits from its larger size and cheaper costs compared to those of global competitors. CRRC spends 7x more on research and development (R&D) than Alstom and its high-speed trains cost one-third to one-half of those made in Germany. By combining forces, Siemens and Alstom will look to cut overlapping R&D and other costs, helping the new company to more effectively compete with CRRC in, for example, emerging market countries that are building new railways.

For markets: Alstom shares have performed better than Siemens shares since the announcement.

Research analysts say the deal will offer Alstom more (in terms of growth opportunities and value creation, e.g. through synergies) than it will Siemens � although Siemens will likely benefit too. Markets appear to agree, with Alstom�s share price up about 17% and Siemens� share price unchanged since the deal talks were first announced last week.