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Business

Smart railroads today, smart cities tomorrow

TOKYO -- Hitachi, the Japanese electronics and heavy machinery conglomerate, thinks it is on track to becoming a major player in the global infrastructure industry.

      At the very least, it went a little further along that path Tuesday when it officially agreed to acquire railway and signaling units from Finmeccanica, an Italian defense and aviation company. The roughly 260 billion-yen ($2.17 billion) acquisition is Hitachi's biggest-ever.

Hitachi CEO Hiroaki Nakanishi meets reporters in Tokyo's Chiyoda Ward on Feb. 24.

     Hiroaki Nakanishi, Hitachi's chairman and CEO, called the deal an important foothold in the company's climb. Hitachi had entered into negotiations for the businesses in 2012, but the talks broke down over Finmeccanica's demand that Hitachi not cut any jobs. The negotiations re-opened last summer as Hitachi relented.

     Finmeccanica owns a 100% stake in railway car unit AnsaldoBreda and 40% in signaling unit Ansaldo STS. Under the two-step deal, Hitachi will purchase all of that equity for about 110 billion yen, then launch a mandatory tender offer on all remaining Ansaldo STS shares listed on the Milan Stock Exchange. The deal is expected to close later this year after the relevant anti-monopoly authorities grant their approval.

     The deal will take Hitachi's railway business a long way into the global market. With the acquisitions, Hitachi's sales from railway businesses will swell more than 100% to 410 billion yen, about half what the industry's top global players now pull in. In the future, Hitachi intends to increase those sales to 800 billion yen. Currently, Hitachi's railway business gets annual sales of roughly 170 billion yen. Breda takes in annual sales of about 70 billion yen, while STS generates around 170 billion yen worth.

     Hitachi intends to achieve an operating margin of 10% in 2018 by improving production efficiency while also retaining the Italian companies' existing factories and jobs, as required by terms of the acquisition.

     The main target of the deal was Ansaldo STS. Selling railway signaling and control systems is expected to remain profitable for some time to come. The same cannot be said for selling train carriages, which Chinese companies are increasingly offering on the cheap.

     STS, formerly known as Union Switch & Signal, was originally founded in 1881 by George Westinghouse, an American inventor and industrialist who invented the railway signaling system and later founded Westinghouse.

     STS currently has 4,000 employees in the U.S., Denmark and around 30 other countries. It is No. 2 in the global signaling market, with the ability to construct and deliver entire subway systems.

     Elsewhere in the industry, Germany-based Siemens in 2012 purchased British railway signaling company Invensys Rail for roughly $2.5 billion, and France's Alstom has been mulling whether to buy General Electric's train signal business.

     "Railways could make an essential part of smart city projects," said CEO Nakanishi.

     Hitachi's railway control systems have built-in fail-safe mechanisms; if there is trouble anywhere in the sprawling network, the system takes up the slack and continues operating. This feature is applicable to what travels over or through a variety of other infrastructure networks. It could keep constant and accurate track of the flow of street traffic. It could pinpoint where ordered goods are while en route to their destinations.

     Hitachi's goal is to create environment-friendly smart cities that make use of advanced information technologies the same way trains make use of signaling and switching systems.

     Hitachi sees itself building sophisticated networks for construction machinery, information systems, medicine, automobiles, elevators and health care.

     This sets Hitachi apart from GE, which has been focusing on power generation systems and aircraft engines, and from Siemens, which aims to expand by acquiring companies like Dresser-Rand of the U.S., a global supplier of rotating equipment and aftermarket parts and services.

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