Pinto's Prognostications:
Honeywell, under CEO Michael Bonsignore, has been in trouble for a while-operating cutbacks and short cuts
couldn’t hide the lack of growth and profit.
Allied merger brings no benefits
Larry Bossidy of AlliedSignal, with no heir to his throne, engineered a merger with Honeywell about a year ago,
with Bonsignore as the new CEO. However, Bonsignore didn’t deliver the restructuring synergies he had promised
and his seat was getting rather uncomfortable, to say the least. The best way to escape the hot seat and gain another
couple of years is by confusing the issue with another merger.
So, while we kept expecting that IAC (the controls group within Honeywell) would be sold off,
the whole thing tumbled beyond our prognostications. United Technologies and Honeywell announced an
agreement to merge, valuing Honeywell at about $40 billion in UT stock.
United Technologies bid becomes short-lived
UT has some synergies with Honeywell and a PE ratio of about 20 (which declined on the merger news,
while Honeywell’s stock improved). A day later, with news of other bidders, UT simply backed off-it had
no wish to engage in a bidding war, especially against GE.
Of course, UT is still on the prowl for other acquisition possibilities, though it’s unlikely to go after
Invensys and/or Rockwell (the other 2 companies in trouble that were discussed in October 2000.) Why? Because
UT is primarily interested in the aerospace and other Honeywell business segments, and not industrial controls
which has no growth. It must be noted that Rockwell Collins recently bought Kaiser Aerospace for $300 million
and this may be the segment that interests UT.
GE jumps in
The Honeywell board quickly accepted the GE bid of $45 billion as the best alternative. Several Honeywell
businesses are attractive to GE-about $15 billion revenue in aerospace, $5+ billion in plastics, plus home
and building automation. IAC process control seems to complement GE Fanuc’s PLCs and numerical controls.
There is some synergy with the sensing and control group, the old Microswitch, which has already formed an
alliance as GE-Microswitch.
Siemens, Tyco, and Emerson had been mooted as possible bidders, but the opportunity has quickly passed.
Clearly, after the dust has settled each can bid for the pieces of Honeywell that GE doesn't want.
To PE or not to PE
It’s my opinion that the GE acquisition will simply create more problems for IAC, which becomes an even
smaller (and less desirable) fish in a larger pond. GE staff had previously proposed to Jack Welch that GE
should buy either Emerson or Honeywell; Welch is reported to have responded, “We have a PE of 50. If you are
viewed as being in the industrial market you will have a PE of 20. Why should I throw away 60% of the GE market-cap?"
In the case of Emerson, Jack Welch went on to say, “Chuck Knight is legendary in his ability to wring
cost out of an operation and to drive operational excellence with his best cost producer strategy.
Given this, what is the synergy that we will get that would cause GE to buy Emerson?"
Depends on what is is
During the early part of the fateful week (October 15-22 2000) the story about Siemens published in the
Sunday Telegraph in the UK stimulated a categorical statement by Bonsignore that IAC was a core business
and not for sale - the rumor was simply “from another planet.” This prompted John Weber, president of IAC,
to broadcast an eMail to all IAC employees stating “unequivocally” that IAC was not for sale.
One wonders whether his boss had already informed him about the UT merger beforehand? Or, perhaps
he had simply been assured that IAC was a core business that would not be split off. Given the circumstances,
I don’t see how Bonsignore could possibly have made that assurance.
Interesting sidelight: When there is some truth to a rumor, people typically say: "no comment".
When there is no truth, they feel free to flatly deny. Bonsignore flatly denied that there would be a
sale of IAC to Siemens, even as he evidently knew that an announcement of the UT deal was pending
(the very next day.) You know how it is - it depends on what your definition of is is....
Whither IAC?
In spite of Weber’s protestations, it’s my opinion that IAC will inevitably be sold off.
The only value left, after a decade of use as a cash cow, is the aging installed base of TDC systems.
The products and systems are poor designs by today’s standards and there is nothing new brewing.
Siemens is probably the only company that would really want it, and any reasonable offer price is
probably sufficient for GE to dump IAC.
The employees at IAC are the real losers-they have been short-changed for the better part of a
decade and now they will simply get jerked around again.
Post-merger machinations
As for Honeywell itself, the merger/buyout is simply an escape route for Bonsignore-he was in
trouble and the Honeywell board was already seeking his replacement. As part of the UT deal,
he would have become chairman (but not CEO) - which was simply a way to kick him upstairs.
With GE, his exit will not be as graceful. Jack Welch is a good friend of ex-Allied (Honeywell)
chairman Larry Bossidy, whose ego and pocketbook have suffered significantly through his bet on
Bonsignore. Undoubtedly Bossidy has shared his misgivings with Welch. GE has an excellent management
team and it’ll quickly root out any operating irregularities, as well as the organizational overlaps.
During the reorganization, you can guess who will stay and who will go.
Jack Welch had been scheduled to retire from GE this year and is shortly about to name his successor.
With the Honeywell merger, he has agreed to stay on for about another year, though he has insisted that
he will name his replacement soon. With the merger, Bonsignore and 2 other Honeywellers will join the
GE board. Bonsignore has made no secret in the past about his admiration for Jack Welch and he has been
anxious to be perceived in the same light. There is little doubt that he has hopes for the top job at GE;
for my part, I’m certain that he’ll be exited swiftly, but with the undeserved consolation prize of a
higher price for his Honeywell stock.
Stay tuned....
Update : 28 March '01
Will GE dump Honeywell?
The deadline for approval for the GE takeover of Honeywell was March 6
2001. This has now been extended because of a "full probe" by the European
Commission, and may face a four-month investigation.
This relates to whether or not the the Honeywell Avionics business is an
anti-trust issue. Defense and aerospace group BAE Systems probably
initiated the anti-competitive review, and is quickly jumping in to see if
they can buy the Honeywell avionics business; but, Avionics is the very
reason that GE wanted to buy Honeywell in the first place. The rest of
Honeywell is "baggage" to GE, and GE has already said it will not make
significant disposals to get the deal through.
Sources report that the overall Honeywell and IAC (particularly!) due
diligence results were "really ugly": use of aggressive accounting
practices (e.g. recognizing revenue on a project before you even have the
order!), an eroding product portfolio, a shrinking market position and
costs that are out of control. This wouldn't have been enough to cause GE
to scotch the deal by itself, since GE really did not anticipate much
benefit from IAC in their acquisition model. They would have either sold
IAC or slashed expenses, restructured and harvested it.
This situation - plus the European Commission objection - may be bad enough
to make Jack Welch welch, rather than destroy the GE stock value. The GE
market cap is down almost a quarter of a trillion dollars since they
announced this deal. GE might have just been given a "get out of jail free"
card, since the Honeywell purchase was contingent on regulatory approval.
Mike Bonsignore, the Honeywell CEO is really the one responsible for the
mess. And, interestingly enough, Bonsignore's total personal compensation
for the two desperation sales of Honeywell (first to Allied, and now to GE)
will be about $150 million. Yahoo's insider trading report on Honeywell
lists the following transactions :
- 5 Feb 01 : Michael R. Bonsignore Exercised Options at $23.10/Share and Sold
at $49.07/Share. Proceeds of $2,597,000.
-
2 Nov 00 : Michael R. Bonsignore Exercised Options at $17.66/Share and Sold
at $53.19/Share. Proceeds of $3,997,089.
-
30 Oct 00 : Michael R. Bonsignore - Proposed Sale (Form 144). Estimated
proceeds of $4,915,322.
-
20 April 00 : Michael R. Bonsignore Exercised Options at $17.49/Share and
Sold at $56.00/Share. Proceeds of $1,545,791.
-
19 April 00 : Michael R. Bonsignore Exercised Options at $16.14/Share and
Sold at $55.00/Share. Proceeds of $1,551,952.
Insider Trading for Honeywell
Pinto-Prediction
The GE purchase of Honeywell will fall apart. This will
leave Honeywell in a mess and present a difficult situation for the
Honeywell Board and Bonsignore. If by some chance the sale does go
through, look for Bonsignore to be booted - albeit with a few millions in
his pocket.
Update : 18 June '01
GE dumps Honeywell
The $41 billion merger of General Electric and Honeywell has been all but called off after GE refused the European
Commission's demands to cut the size of the combined company. GE (represented by Jack Welch himself
- his last hurrah before he exits center-stage) said Friday (15 June '01) that they won't make changes
to a divestiture plan that was rejected by EC officials.
Honeywell said it still wants to merge with GE, but announced it was now considering its future
as a stand-alone entity.
Pinto prognostications
Frankly, it is doubtful that Honeywell can "stand alone" at this stage.
The company has some good pieces (including Avionics that GE wanted), but most of the remaining segments
(including IAC - Industrial Automation & Controls) are in poor shape and, under GE, will be re-organized or divested.
At the end of trading on Friday (15 June '01) Honeywell stock closed at $38.80, down about 20% from the
previous week (before the announcement that the merger had run into problems). GE closed at $48.81,
down only slightly over the same period, after going up a bit. Evidently the stock market favors GE
backing off the merger, while it considers the future of Honeywell uncertain.
GE wanted to buy Honeywell primarily because of the Avionics business - with Honeywell IAC as a poor
relation. I have suggested previously that, if the Honeywell acquisition went through, GE would sell off
IAC, probably to Siemens.
When GE recognized that Honeywell's condition was not as healthy as anticipated, they needed to find
a way to back off from the deal. And this is the face-saving way for Jack Welch. Recognize that making
a "low ball" offer (to the EC) is simply GE's way to back out of the deal, without making it look
like Jack Welch is "welching".
With the relatively poor shape it is in, Honeywell cannot continue alone. This whole downhill slide started
after the merger with Allied Signal which didn't yield the promised results. So, Michael Bonsignore,
Honeywell CEO (the person primarily responsible for the mess) worked a deal with United Technologies,
which then brought Jack Welch and GE into the game. Unwilling to start a bidding war, United backed off.
Now United may come back, though their offer won't be as good as their previous bid.
Like GE, they want the Avionics business. Unlike GE, they have very little industrial automation
business and will seek to divest IAC and other pieces.
The Europeans, Siemens or Schneider, will make a bid that would easily be approved in
Europe and the US, because it is well recognized that Automation is in a merger/consolidation
mode. Both Siemens and Schneider do not have any Avionics business and will divest that valuable piece.
Who knows, perhaps KKR or Warren Buffet will make an offer for both Honeywell and Invensys
(also in similar trouble), to piecemeal them off.
Update : 22 June '01
More on : GE dumps Honeywell - Immelt says 'zero chance'
My analysis about how and why GE abandoned the Honeywell merger has clearly
been justified by reports and events that followed the news last week. GE
was having trouble with the European Commission regarding the avionics and
aircraft businesses they would need to divest before the merger could be
approved. My take was that GE was backing down because their due diligence
had shown that Honeywell was not as "clean" as they expected. The
rationale: If GE really wanted Honeywell, they could/would continue to
negotiate with the EC.
After digesting the news and events over the past weekend, Jeffrey Immelt,
the new GE CEO (after Jack Welch departs) felt that he had to confirm the
decision. People were saying that Jack Welch really-really wanted this
because he had committed himself in public and would lose face if it didn't
happen. And, others reported that GE would inevitably come back with
further offers, and political clout, to help the EC acquiesce. So, to quell
further speculation, Immelt came back with a resounding and emphatic "Zero
chance!"
The Honeywell Board of Directors came out with a strong statement of
support, saying that they would "do everything possible" to make the GE
merger go forward. They did this because they recognized that it was the
best hope for Honeywell at this time. After Immelt's "zero chance"
declaration, recognizing the futility of that direction, Honeywell followed
with a statement saying they were indeed looking at their alternatives as a
"stand alone" company.
A European observer close to the cacophony, reported:
"Big deals are often done for reasons of weakness rather than strength.
Examples: BTR/Siebe, Honeywell/Allied Signal, Daimler Chrysler. Can you
name a big industrial deal that has gone well? GE itself does not stand up
well to a close scrutiny. I suspect that Jack Welch wanted to do a big deal
to muddy the water. 9% of GE's income came from its pension fund; this
profit source is going to be small and maybe even negative in 2001. GE was
planning to take a $6 b provision for integrating Honeywell - that gives a
lot of scope for meeting earnings targets for a couple of years. When they
found that the provisions may be more, they had to find a way to exit
gracefully."
Pinto Prognostications
The GE/Honeywell merger has a "zero chance" of going forward. Jack Welch
will retire with grace - he gets a lot of credit (and forgiveness) for the
good things he has done to build GE over the past decades.
United Technologies will come back, with a bid that is lower than their
previous one that started this whole affair. TYCO, Emerson and others are
calculating whether or not they should probe the possibilities. The
Europeans (Schneider and Siemens) will try to pick up the pieces they want,
and sell off the pieces they don't understand. The Japanese are watching
anxiously, but are too slow to run the race. Honeywell cannot "stand alone"
and is looking for anything that makes sense. CEO Michael Bonsignore will
inevitably be booted for causing this mess.
As we go to ePress on Thursday (21 June 01) night, the two stocks that had
been at approximately equal prices before the storm, ended significantly
apart. Honeywell stock has been downgraded by several analysts and closed
at $36.75, down from the previous week. GE went up to $51.25, indicating
support for the "zero chance" result.
Update : 29 June '01
GE & Honeywell negotiation ploy
On Wednesday (27 June '01) GE is reported to have made an eleventh-hour
effort to win European approval for its proposed $41.2 billion takeover of
Honeywell. The U.S. government unleashed a new broadside in support of the
deal. The new talks seemed to offer a glimmer of hope, but the European
Commission called the proposals insufficient.
GE & Honeywell float last-minute offer
June 28 2001 : EU calls GE proposal 'insufficient'
Richard Corles [richard.corles@worldnet.att.net] ex-Honeywell IAC, Phoenix
Arizona, brought up this interesting thought:
"This GE/Honeywell thing. I think what is going on is positioning to avoid
paying penalties. If I remember correctly both sides agreed to a $1 billion
payment to the other if it backed out of the merger. Therefore when we see
the Honeywell board strongly supporting the merger, and suggesting that GE
could negotiate something, they have in mind getting $1 billion.
Conversely, when Jack (Welch) is saying that the EC is asking too much, it
is trying to put the blame on the EC and allowing itself to avoid the
penalty. Assuming that the merger does not go through, we might expect the
lawyers to working this for a while."
A high level source close to the original GE negotiations provided these
interesting insights:
"No one at my level was made aware of the details of the deal that Jack
(Welch) cut with Honeywell in order to get them to drop the United Tech.
offer. We all assume that Honeywell got some financial incentives to
complete the deal; this is usual. The legal teams would have put in terms
on that protected GE from regulatory rejection of the deal. Essentially,
that is the protection that Jack (Welch) can hide behind.
"GE maintained a position of the value of the deal being Avionics and the
capital leverage. All moves the EU asked for diluted that value and did not
allow GE to get what it bought. GE did not want the other pieces and would
have sold them off. Honeywell can ask for a penalty if there is evidence
that GE could really have done the deal, but backed down."
Pinto Prognostication
I had previously reported that GE will NOT
proceed with the acquisition/merger of Honeywell, because their due
diligence showed that the deal was simply not clean enough. I re-confirm
that analysis:
JimPinto.com eNews 22 June '01
In the GE/Honeywell merger agreement, when GE offered to top the United
Technologies offer, there was a penalty for backing out of the merger.
Honeywell will no doubt try to enforce that penalty if GE backs off without
good reason.
GE had previously said that they would not negotiate further. And, last
week's comment from Jeffrey Immelt, GE incoming CEO, that there was "zero
chance" of the deal going through brought a protest from Honeywell (who for
their part insisted that they would "do everything possible" to make the
deal happen).
This new "eleventh hour" try to negotiate is, in my opinion, just a ploy to
placate the political forces, to show that GE is making a good effort to
make the deal happen. In reality, (my opinion) GE is simply trying to avoid
the real possibility of merger-breakage penalties.
Stay tuned...
Update : 3 July '01
GE & Honeywell merger finally off
This past week, in a last-minute effort to overcome antitrust concerns and
close the deal, Honeywell offered to cut $1.8 billion off its purchase
price to compensate GE for divestitures. Honeywell said it would reduce the
stock exchange-ratio on the deal to 1.01 shares of GE for each Honeywell
share - down from the previous ratio of 1.055 shares of GE.
Shortly after the Honeywell offer, GE Chairman Jack Welch strongly rejected
the proposal, saying that the plan "makes no sense" for GE shareholders.
Shares of Honeywell closed down $3.21, or 8.4 percent, to $34.99. Honeywell
stock had declined to a session low of $33. Trading in Honeywell spiked,
reaching nearly 52 million shares versus average daily volume of about 8
million, as arbitrageurs unwound trading positions. On the other hand, GE
shares edged up 13 cents to $49 on above-average volume of more than 50
million shares.
Finally, on Tuesday morning (July 3, 2001) the European Commission formally
rejected the merger, closing the case.
What next? CEO Michael Bonsignore will be kicked out by the Honeywell
board; United Technologies will come back with an offer, though not as high
as their previous bid; others (possibly Emerson, Siemens, Tyco) will make
bids, to keep the pieces they want and divest the remainder.
Honeywell offers to cuts purchase price
Welch rejects Honeywell offer
EC Rejects the GE/Honeywell deal
Update: 9 July '01
GE/Honywell - after word
I had a tremendous response to our coverage of the GE-HONEYWELL fiasco.
Apparently, no one seems to tell the underlying details.
As predicted, the Honeywell board has booted Bonsignore. My question is: if
Bonsignore was responsible for a lot of the trouble, why does he deserve a
"golden parachute"?
Larry Bossidy, CEO of Allied-Signal before the merger, is now ensconced as
the turn-around manager. His stated goal of keeping Honeywell independent
for about a year, fixing it up and putting it up for sale again, will drive
both employees and customers crazy!
A Honeywell employee, not wishing to be named because "mavericks are not
cultivated here", sent this :
"With Mike getting the axe, but not falling on his sword, the question
becomes: does Allied Signal know how to run Honeywell?
"At Honeywell, some of us think of a management change as: same circus,
different clown. The last few years have not been directed to maintaining
the internal strengths of manufacturing. The recent emphasis has been on
creating a model of GE management. Not all of the changes seem well
thought out. The losses of key skills and company-ethos reflect this
decline.
"Top management tells us that the plan for the year is 20% growth, because
Wall Street expects it. What ever happened to reality? Does Allied-Signal
management have the knowledge and the culture necessary to continue the
success of various Honeywell segments? At least the GE wait is over."
If you recall, we brought up the possibility that GE under-bid the EC
demands simply because it was an easy out. Well, now Honeywell is
considering taking legal action and has retained attorney David Boies,
well-known for representing the U.S. government in its case against
Microsoft, to explore whether Honeywell has a case against GE for failing
to undertake "reasonable best efforts" to win antitrust approval of the
deal as required by the merger agreement.
Larry Bossidy, himself ex-GE and a good friend of Jack Welch, said he had a
"general conversation" with the GE Chairman on Tuesday morning, but he
didn't provide specifics. It is unclear whether Bossidy's close ties to
Jack Welch would reduce the chances of Honeywell filing that lawsuit. Stay
tuned...
GE, Honeywell CEOs Take Heat for Lost Deal
TGIF Humor
After the deal with GE fell through, it has been reported that Honeywell
may merge with Fairchild Corp. The new company will be called Fairwell Honeychild.
Another possibility: Honeywell and Rockwell Automation - new name: Honeyrock.
Another wag suggested : WellWell.
Update: 20 July '01
Honeywell background : Bonsignore Bossidy bust-up
In the aftermath of the GE-Honeywell merger bust, The Wall Street Journal
carried this story on July 18, 2001 (summarized here):
Michael Bonsignore, CEO of Honeywell was rattled. Honeywell was reeling
from merger-related woes, and a discreet search was on for a possible
successor. Worst of all, Bonsignore had learned from allies on his board
that Larry Bossidy, his predecessor and the former chief of AlliedSignal,
had privately told directors that Bonsignore wasn't capable of running the
$25 billion conglomerate created by the 1999 merger of Honeywell and
AlliedSignal.
So Mr. Bonsignore pulled the board of Honeywell into a confidential
executive session to confront them. "Either you're with me, or kick me the
hell out now," he said.
Remarkably, this tussle didn't take place recently but on May 26, 2000 -
more than one year before the Honeywell sale to GE unraveled, leading to
Bonsignore's forced retirement at 60, and the rehiring of Bossidy, 66.
To outsiders, Bonsignore's downfall seemed abrupt. But Bonsignore's
troubles started well before the GE deal was inked. Apparently, he was done
in not only by his leadership failures but also by his strained
relationship with Bossidy.
We should recognize here that Bossidy is ex-GE, and reported to be a good
friend and confidante of Jack Welch.
Update: 24 July '01
Honeywell - Post-GE
Richard Corles [richard@orangewoodconsulting.com] commented on Honeywell, post-GE :
"The Honeywell board has recalled Larry Bossidy to run the company for one
year, officially to "make it self-sufficient again". Bossidy has clearly
failed to find a successor in the past. My conclusion is that the board
expects Bossidy to clean up and sell pieces to interested buyers. GE will
have open access to Bossidy, ex-GE and a good buddy of Jack Welch. GE now
knows which pieces they really want and maybe they will pay a little over a
realistic price as part of a settlement. So, everyone can declare victory.
"Other pieces will be sold off or spun off so that Bossidy can go back to
golfing next year without the need to meddle with his successor - he won't
have one. He simply has a personal interest in this coming out right by
virtue of his stock ownership."
Update: 5 August '01
Honeywell re-organizes after GE exit
If the GE deal had been approved, GE was going to break Honeywell
Industrial Automation &Controls (IAC) into 3 different parts 1) Systems, 2)
Products, 3) Services. After John Weber had gone (deposed IAC chief,
fall-guy for Bonsignore) Ron Sieck of Sensors & Controls (S&C, former
Honeywell Microswitch core, based in Freeport, IL - near Chicago) was given the top IAC job on
an interim basis, pending the GE merger.
Now that the merger is off, chief Larry Bossidy has initiated a re-org,
with a public statement that "red vs. blue" attitudes will not be
tolerated. Bossidy seems to be bringing in ex-Blue (AlliedSignal) folks for
most of his top jobs. He has a one year contract and wants a team he can
work with.
Kevin Gilligan, who was running Honeywell Home & Building Controls, is now
running all of the "old red Honeywell" (with the exception of the aerospace
stuff). This is now the combined "ACS" (Automation and Control Solutions)
which now includes IAC, which itself had included S&C.
Gilligan is NOT highly admired, even among his own troops. He has done
nothing substantial with either products or systems for years. He is
keeping his Home & Building Controls leaders and bringing in some new blood
to head up the projects pieces. Combination of the service businesses makes
sense, as there is lots of synergy there and should have been done long
ago.
Insiders report that, with all the changes and uncertainty, everyone is
still "a little jerky".
Pinto Prognostications:
The Honeywell prize (which both GE and United Technologies wanted) was
Avionics, which is now run independently and Bossidy will sell it
separately.
No one really wants the rest. Honeywell IAC (like Foxboro at Invensys) may
be better off consolidated with Siemens, Schneider or Emerson. Investment
has languished and these companies will need a lot of new developments and
leadership to thrive again. In both cases, the problem is that the
financials have been fiddled, making a lot of write-offs likely.
Cash coverage is unhealthy and that means, as separate businesses, they'll
have to sell assets for liquidity. This makes purchase by independent
asset-sellers the most likely scenario. In spite of Bossidy's one-year
timeframe (similar to Haythornthwaite's at Invensys) both companies will be
accepting offers from all reasonable buyers for any or all of the pieces.
The next few months will be interesting.
GE, Tyco, Emerson and others are certainly "looking" at both Honeywell and
Invensys. My own opinion is that they will wait for the pieces they want
to be available separately.
Let me give my friends at Foxboro, Honeywell IAC, Eurotherm and others some
comfort: the strength of your companies is in your middle management and
installed base. Whoever acquires it will be looking for the key ingredients
that make a difference - YOU, the management that can help make your
company a success.
Stay tuned....
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