Prognostications on the Honeywell Saga

By : Jim Pinto,
San Diego, CA.

The Honeywell saga started first as the sale of the controls division to Siemens, then the merger of the whole enchilada with United Technologies and then ended a couple of days later with the sale to GE - it all happened in less than a week! In these days of fast-moving events, this is a story that is as exciting an any.

Few industry journals and financial newspapers tell the whole, unbiased background and story. Read it here.....

The original version of this article was published in
Controls Intelligence & Plant Systems Report, November 2000

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 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.

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Copyright 2000 : Jim Pinto, San Diego, CA, USA