February 9, 2007
Consolidation: GE & Smiths; the joint Venture
Analysis of:
G.E. Buying a British Aerospace Company | www.nytimes.com
This analysis is solely the work of the author. It has not been edited or endorsed by GLG.
Implications: Both GE and and Smiths Detection are leaders in complementary technologies that, when merged, could allow the formation of a company that can provide comprehensive solutions to various homeland security applications. Challenges remain in forming and executing this JV and the time required will give competitors a chance to gain influence.
Analysis: A joint venture (JV) between security powerhouses GE Detection and Smiths Detection looks great on paper, but what will it likely mean as the details get worked out? This analysis highlights some of the strengths, weakness, opportunities and threats of this bold move.
Strengths: Smiths Detection, through its purchase of Heimann System is the recognized leader (at least in terms of quality) of X-ray systems used to screen anything from mail and baggage up to cargo containers. It has an established world-wide presence and installed base of a broad selection of technologies. However, it lacks one critical technology especially for the US: TSA Certified explosives detection systems (EDS) for hold (or checked) baggage screening. Now, with Europe requiring future systems to meet strict TSA-like Certification standards by 2011, Smiths could have found itself either pushed out of its market, or facing an extensive, costly development effort to keep or enhance its market share, while fending off increasing competition from companies such as Rapiscan, L3 Communications and newcomers like Reveal Imaging. Enter GE Security, which pioneered the development of Certified EDS in the early 90s. Through its 2006 purchase of InVision Technologies (my former company), the JV now can combine the strengths, product diversity and market reach of Smiths Detection with the missing piece of the puzzle: TSA Certified explosives detection.
Weaknesses: There are several hurdles the companies face in achieving JV nirvana. First, the acquisition of Heimann by Smiths has not been smooth. Overcoming rivalry and cultural differences between Smiths Aerospace (British) and Heimann Systems (German), has taken time. Now, the formation of the JV throws another level of uncertainty into Smiths. Likewise, GE's InVision acquisition has not fully stabilized. In imposing its corporate culture on InVision, GE cut deep into - and excised most of - InVision's management and technical personnel. Several previously loyal customers have complained to me about the new arrangement. Further disrupting the reorganization could lead to loss of more key personnel potentially going to more stable competitors. At a minimum, forward progress will likely slow down or even halt as rearrangements are made, the JV's new management takes over, hiring occurs and business processes are reconciled, modified and eventually adopted. It is possible, given the transnational nature of the JV, that this could take 3+ years to fully shake out once it starts (currently the JV is only a letter of intent). Also, given that both companies have the vast majority of the trace detection market; especially in the US, there could be some anti-trust issues which could delay the formation and dilute the companies' offerings, which could affect other partnerships aimed at the mass transit security markets (such as GE's relationship with Cubic Transportation Systems).
Opportunities: If the transition can be managed, Smiths GE Detection can command a strong presence in all aspects of aviation - and indeed transportation - security. As airports move to integrate and upgrade their aging hold baggage screening systems, Smiths GE is in an excellent position to offer total solutions to airports and compete directly against L3 Communications, who currently offer such a system but purchase their Certified systems from an outside supplier (Analogic). Aside from X-ray systems, the companies are leaders in developing trace explosives detection systems. If defendable against any anti-trust litigation, their combined market share and development capability will allow greater technology improvements and dissemination into new markets (e.g. cargo, mass transit). Also, the transatlantic partnership allows Smiths GE to compete within both the US and Europe in a more balanced manner (GE is more US based and focused, Smiths is more European based and focused) than either was able to do prior to the JV.
Threats: Smiths GE's primary competitors are L3 Communications and OSI Rapiscan. Of the two, L3 has the widest array of technology that can directly match Smiths GE's. They have Certified EDS, access to new technology for passenger screening (that uses millimeter waves) and have the advantage of being several years into their reorganization following their buy-out of Perkin Elmer's security group, which gave them much of the technology that directly competes with Smiths. OSI Rapiscan has the low cost, decent quality capabilities in much of the same areas. It has access to neutron inspection technology (which neither L3 or GE currently possess) that can be used for cargo screening, but does not yet have a Certified EDS (though a system is under development).
In summary, it appears that GE and Smiths are planning for the long haul and have a long range vision. In the meantime, disruption of their respective organizations during the formation process could allow the competition to syphon off valuable personnel and use the uncertainty to take business away from both companies. Also, it'll be interesting to see what happens to OSI Rapiscan Systems - which is definitely the junior player now and could be ripe for some consolidation. In a conservative industry like this one, it takes time for the end users/ purchasers to get used to change.
Analysis: A joint venture (JV) between security powerhouses GE Detection and Smiths Detection looks great on paper, but what will it likely mean as the details get worked out? This analysis highlights some of the strengths, weakness, opportunities and threats of this bold move.
Strengths: Smiths Detection, through its purchase of Heimann System is the recognized leader (at least in terms of quality) of X-ray systems used to screen anything from mail and baggage up to cargo containers. It has an established world-wide presence and installed base of a broad selection of technologies. However, it lacks one critical technology especially for the US: TSA Certified explosives detection systems (EDS) for hold (or checked) baggage screening. Now, with Europe requiring future systems to meet strict TSA-like Certification standards by 2011, Smiths could have found itself either pushed out of its market, or facing an extensive, costly development effort to keep or enhance its market share, while fending off increasing competition from companies such as Rapiscan, L3 Communications and newcomers like Reveal Imaging. Enter GE Security, which pioneered the development of Certified EDS in the early 90s. Through its 2006 purchase of InVision Technologies (my former company), the JV now can combine the strengths, product diversity and market reach of Smiths Detection with the missing piece of the puzzle: TSA Certified explosives detection.
Weaknesses: There are several hurdles the companies face in achieving JV nirvana. First, the acquisition of Heimann by Smiths has not been smooth. Overcoming rivalry and cultural differences between Smiths Aerospace (British) and Heimann Systems (German), has taken time. Now, the formation of the JV throws another level of uncertainty into Smiths. Likewise, GE's InVision acquisition has not fully stabilized. In imposing its corporate culture on InVision, GE cut deep into - and excised most of - InVision's management and technical personnel. Several previously loyal customers have complained to me about the new arrangement. Further disrupting the reorganization could lead to loss of more key personnel potentially going to more stable competitors. At a minimum, forward progress will likely slow down or even halt as rearrangements are made, the JV's new management takes over, hiring occurs and business processes are reconciled, modified and eventually adopted. It is possible, given the transnational nature of the JV, that this could take 3+ years to fully shake out once it starts (currently the JV is only a letter of intent). Also, given that both companies have the vast majority of the trace detection market; especially in the US, there could be some anti-trust issues which could delay the formation and dilute the companies' offerings, which could affect other partnerships aimed at the mass transit security markets (such as GE's relationship with Cubic Transportation Systems).
Opportunities: If the transition can be managed, Smiths GE Detection can command a strong presence in all aspects of aviation - and indeed transportation - security. As airports move to integrate and upgrade their aging hold baggage screening systems, Smiths GE is in an excellent position to offer total solutions to airports and compete directly against L3 Communications, who currently offer such a system but purchase their Certified systems from an outside supplier (Analogic). Aside from X-ray systems, the companies are leaders in developing trace explosives detection systems. If defendable against any anti-trust litigation, their combined market share and development capability will allow greater technology improvements and dissemination into new markets (e.g. cargo, mass transit). Also, the transatlantic partnership allows Smiths GE to compete within both the US and Europe in a more balanced manner (GE is more US based and focused, Smiths is more European based and focused) than either was able to do prior to the JV.
Threats: Smiths GE's primary competitors are L3 Communications and OSI Rapiscan. Of the two, L3 has the widest array of technology that can directly match Smiths GE's. They have Certified EDS, access to new technology for passenger screening (that uses millimeter waves) and have the advantage of being several years into their reorganization following their buy-out of Perkin Elmer's security group, which gave them much of the technology that directly competes with Smiths. OSI Rapiscan has the low cost, decent quality capabilities in much of the same areas. It has access to neutron inspection technology (which neither L3 or GE currently possess) that can be used for cargo screening, but does not yet have a Certified EDS (though a system is under development).
In summary, it appears that GE and Smiths are planning for the long haul and have a long range vision. In the meantime, disruption of their respective organizations during the formation process could allow the competition to syphon off valuable personnel and use the uncertainty to take business away from both companies. Also, it'll be interesting to see what happens to OSI Rapiscan Systems - which is definitely the junior player now and could be ripe for some consolidation. In a conservative industry like this one, it takes time for the end users/ purchasers to get used to change.
Report a Concern
More GLG News in
Energy & Industrials
Most Popular:
Source Article | Expert Analyses
BASF Cuts Profit Goal, to Idle Plants as Orders Drop
www.bloomberg.com
YRC to Get Concessions?
tdu.org
Half of dry bulk orders will ‘not be delivered’
www.lloydslist.com
Weekly US rail shipments tumble 9.1 percent
biz.yahoo.com
Amid economic crisis, wind power spins more slowly
features.csmonitor.com
The gale of a credit crisis blows the wind away!
November 26, 2008
The Peaksters are right on theory, perhaps wrong on timing
November 25, 2008
BASF, Dow Chemical, PPG signal arrival of new world financial order
November 24, 2008
Petrochem Giants in Crisis Mode
November 20, 2008
Land Ahoy...The Dawn of Concentrated Solar Power
November 18, 2008