Not without risk

The strategic manoeuvring behind the Vestas-NEG Micon merger aspires to make the small provincial town of Randers, in the centre of the Kingdom of Denmark, the epicentre of the world of wind turbine manufacture. Reaction to the deal by stock market and industry analysts -- and particularly enthusiasm for it -- appears to taper off the further from Randers you get.

While some hail the merger as creating a world leader that will take capacity out of the market and reduce price pressure (page 23), for others it looks like a classic "defensive" merger: closing ranks to keep competition down and foreign predators away. Indeed, presentation of the news to the Danish public and politicians -- and the initial press reports of the announcement -- contained much flag waving language from chests puffed with national pride.

Critically, this merger is set against the backdrop of both companies issuing recent profit warnings and amid concerns about the adequacy of their finances. These concerns must be put to rest immediately. To do that requires investor confidence and support. It remains unclear whether the merger will mitigate, or just amplify, the underlying issues. Excluding the growing spectre of General Electric's fast growing wind division, investors had three particular concerns before the merger announcement. First, there was worry about the ability of the leaders of both companies to properly manage growth and market volatility (specifically the roller-coaster tax-driven market in the United States) without sending the stock -- and investor confidence -- on a roller coaster too. Second, the management's track record in delivering promised financial results left much to be desired. Third, both Vestas and NEG Micon needed to be bigger and better capitalised.

As a result of the proposed merger, at least three additional items have been added to the list: management's ability to carry out the merger integration without it becoming a dangerous distraction from the real business of running the company; how realistic the heralded cost savings to be had from merger synergies really are; and whether regulatory approval of the merger will come fast enough not to leave the entire deal in limbo for weeks or months.

The new management's focus on the enhanced market and sales balance of the merged Vestas comes through clearly. Where Vestas is weak, NEG Micon is often strong, they point out. At a conceptual level it is one of the main potential benefits of the deal. Whether this will result in better turnover and profit forecasts and improved general management still remains to be seen -- as does evidence that Svend Sigaard and Torben Bjerre-Madsen are of the calibre and international stature to raise Danish wind turbine production from the ranks of the risky investment to a respected member of world class asset-management portfolios.

The issue of capitalisation in the wind industry has not yet received enough attention. Quite aside from the net working-capital issue -- and again excepting the all-mighty GE -- there remains a pressing need to strengthen every wind turbine manufacturer's capital base. The merger announcement hit on the reasons why: as turbines get bigger so does the need for expenditure on technology advancement; and having a strong capital base is essential for winning and delivering increasingly large projects. The response to this crying need, however, the planned EUR 270 million capital increase by the new Vestas, was mentioned last and little. Simply putting the two companies together without a capital increase will not help. Bigger is only better if better capitalisation is the result.

What if

Vestas' investors also have to consider if, with more capital, steady organic growth and further select small-scale acquisitions, a strengthened old Vestas would have been better than a strengthened new Vestas. The answer lies in management's ability to integrate the two businesses, never an easy task as NEG Micon has demonstrated, first through its struggles to hatch from the merger of Nordtank Energy Group and Micon, then with its problematic purchases of fellow Dane Wind World and Nedwind in Holland.

Delivery of the anticipated cost savings is also key to the merger's success. Cultural similarities are clearly important. The flip side of that is whether the tough cost-cutting close to home will be carried out as required, or fudged. Denmark is not Germany, however, and lay-offs are an accepted part of the country's business culture, provided they are managed well.

Another "if" involves Europe's competition rules. One of the main attractions of the deal is the consolidated market share -- 35% is the target. For this reason, anti-trust approval is a concern. A bruising encounter with competition authorities, regardless of outcome, is not a welcome prospect. Reduced competition is either good news or bad news depending on where you sit. But wind turbine manufacturers strong and stable enough to operate and profitably fuel the sector's growth are in everybody's interest. This is an important transaction, not only for the new Vestas, but also because it ought to set off a wave of further consolidation among the turbine making competitors.

The new Vestas has a long list of action items and New Year resolutions. It will be important to keep value creation, capitalisation, and investor confidence high on the list. The best way to have a powerful future is to have a profitable present.

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