United Technologies Merger Bid: Why Honeywell Is Wrong

The CEO of Honeywell International Inc. (NYSE: HON), David Cote, certainly is a persistent suitor.
United Technologies Corp. (NYSE: UTX) CEO Greg Hayes very plainly rejected Honeywell’s $90.7 billion acquisition offer on CNBC last week, saying, “It ain’t going to happen.”
Yet Cote persists in trying to get United Technologies to the altar. He says he is not concerned over possible objections to the deal by both regulators and customers of the two companies. Meanwhile, Hayes insists there’s no way the deal ever gets done because of those very same objections.
So who is right?

The Deal Will Get Shot Out of the Sky

Honeywell likes the idea of being a powerhouse with over $100 billion in annual revenues. It cited the upside to the deal: “The value creation from a combination is significant, including the benefits of $3.5 billion in annualized cost synergies.”
The company insists that the only real objection to the deal stems from the egos of United Technologies executives. Honeywell executives would run the combined company.
In my view, Honeywell is wrong and United Technologies and its CEO are spot on the money.
Any approval from regulators of a United Technologies merger with Honeywell would likely take until 2018. And the many divestitures required – because of the large overlap between the companies – would likely outweigh any cost synergies. The two overlap in small aircraft engines, airplane power units, wheels and brakes, and environmental controls.

Source: Financial Times

And let’s not forget those regulators include Chinese ones. The Chinese could be satisfied with the selling of some assets to Chinese firms, but that opens up another can of worms.
In addition, the deal is a bad one for United Technologies shareholders. Honeywell would actually use some of the cash sitting on UTC’s books to fund the deal. As the United Technologies Corp. CEO wrote, “Effectively Honeywell’s proposal is a leveraged buyout of UTC using UTC’s own strong balance sheet.”

Unhappy Customers

Even if one overlooks all of the regulatory obstacles, another hurdle remains. The two biggest customers – Boeing Co. (NYSE: BA) and Airbus Group SE (OTC: EADSY) – have already expressed their reservations over the deal.
Airbus CEO Tom Enders has been particularly outspoken. He told the Financial Times, “I do not see that such a combination would be in the interests of Airbus.” His statement is critical. Airbus represents about 40% of sales at United Technologies’ Pratt & Whitney jet engine business.
Boeing is worried too. It said, “Healthy competition in our supply chain is vitally important to Boeing.”
Already, Boeing is giving more and more contracts to suppliers other than Honeywell and United Technologies. For its upcoming 777X jetliner, it gave the contract for the landing gear to a small Canadian firm, Héroux-Devtek, instead of United Technologies.
Aircraft makers like Boeing are taking such measures in order to push down costs in their supply chains. If a deal were to go through, it is likely that aircraft makers would demand an immediate reopening of their contracts. Lower prices are sure to follow in that scenario.

Honeywell’s Future Glide Path

So what should Honeywell do?
It should just keep doing what is has been doing since the failed takeover by General Electric (NYSE: GE) in 2000.
David Cote built a company that is the model for the industry. Only five years ago, its profit margin was just 9%. It has doubled since then.
Honeywell’s stock has also outperformed its peers by far. Over the past five years, it is up a respectable 80%, not counting dividends. Using the same criteria, United Technologies has been stagnant with a mere 15% gain. And even GE is up only 37%.
“A big deal that goes bad can ruin a company,” Cote told Fortune magazine in May 2012.
He should take his own advice and walk away.

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