United Technologies Drop Merger Discussions With Honeywell

United Technologies (NYSE: UTX) recently announced that it has pulled out of talks related to a potential take over by Honeywell (NYSE: HON). Subsequently, Honeywell issued a press release containing a link to its slide-deck advocating the deal. If the deal would have gone through, both aerospace giants would have created combined sales of a mammoth $97 billion. Following the news, UTC shares jumped by about 80 cents, while Honeywell stocks meandered and closed 40 cents lower. ^[1]

See our complete analysis of UTC here

Honeywell had offered United Tech a premium, consisting mostly of stock with some cash. It was reported by the Wall Street Journal that the deal was worth $108 per UTC share (which represents a premium of about 22% over Friday’s closing stock price), out of which about $42 would be offered to shareholders in cash. Additionally, UTC shareholders would have a combined stake of about 40% after. It is expected that the deal will produce over $39 billion in value creation for UTC shareholders. ^[2] However, this did not entice UTC management, which believed that taking the talks forward was pointless as it anticipated large regulatory obstacles, concerns from customers and valuation issues.

In specific, the company reasoned that combining two of the world’s largest producers in the aerospace and commercial building industries would face “insurmountable” opposition from regulators. The management believes that the regulators would either dismiss the deal entirely or levy significant conditions. Honeywell, though, isn’t very worried about this. People close to the company have stated that any concerns raised by regulators can easily be solved through divestitures. For example, in the aerospace segment where there is an overlap between both companies, certain portions of the businesses could be sold off to ease government concerns of creating a monopoly.

A combination of both companies’ aerospace business would have centred on UTC’s Pratt & Whitney aircraft engine business, which is currently working to better its fuel saving geared turbofan engine for narrow body aircraft. However, there would have been an overlap in Honeywell’s automation and control solutions businesses and UTC’s climate controls and security business. Despite this though, Honeywell maintains that the deal would benefit both companies greatly. ^[3] Stated in its memorandum, Honeywell expects the deal to produce close to $3.5 billion in cost synergies and a ~20% operating margin by the fourth year of operations. Additionally, it argues that the combined company will retain an investment grade credit rating which will appease shareholders and customers.

This concludes a series of talks that have taken place over the past year. It started off when UTC had approached Honeywell to discuss the possibilities of a merger between portions of the two companies. The deal was meant to be a merger of equals, but with UTC management in control. This was primarily because United Tech was larger in value at the time. Unfortunately, these talks broke down when UTC’s stock price declined substantially and neither company could decide on which of the two would be in control of the combined company. However, later last year, Honeywell approached United Technologies with a potential merger deal. The company offered UTC share holders a slight premium for their shares. This deal too was meant to be a merger of equals. These talks broke down as well as UTC reasoned that the deal would never be approved by the antitrust authorities.

See our complete analysis of Honeywell here

Honeywell management was quite shocked to learn that UTC decided to drop talks this time around also. Furthermore, Honeywell was sure that synergies produced by such a merger would produce immense growth in earnings while adding considerably larger value to the overall deal beyond the headlining figure. Honeywell has since abandoned its quest.

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1. Honeywell, United Technologies Held Merger Talks But UTX Pulled Out On Antitrust Worries, www.cnbc.com [↩]
2. United Technologies Rebuffs Honeywell on Tie-Up, www.wsj.com [↩]
3. UTC Closes Door on Honeywell Talks, www.ft.com [↩]