Did United Technologies Help Honeywell Dodge Its Own Bullet?

Talks of a possible takeover between Honeywell (NYSE: HON) and United Technologies (NYSE: UTX) recently fell through. Had the deal gone through, the combined company would have a combined sales of about $97 billion. UTC rejected the deal as its management expected heavy scrutiny from regulators and intense opposition from customers including the military. However, Honeywell maintained its position until the very end. People close to the company believe that any concerns raised by regulators could have easily been put to rest through divestitures. Despite Honeywell’s confidence in the deal, UTC was highly skeptical and decided not to pursue talks any further. All said and done though, it seems that United Tech helped save Honeywell from itself. ((Honeywell, United Technologies Held Merger Talks But UTX Pulled Out On Antitrust Worries, www.cnbc.com))

Considering Honeywell’s past with large merger deals, one would have assumed that the company has learnt just how stubborn regulators can be. In the past, the merger deal with GE fell through because of the unacceptable conditions that were placed on the deal by the European Union. If anything, regulatory processes have become even more stringent in the last fifteen years or so. Proposed merger deals currently under review between Staples and Office Depot,  as well as Baker Hughes and Halliburton, are testament to this fact. In addition, neither of the aforementioned deals would result in a more concentrated market than that which would have resulted from combining the aerospace businesses of Honeywell and UTC. Furthermore, combining the industry activities of both companies would have also raised regulatory concerns. ^[1]

See our complete analysis of UTC here

Had the deal gone forward, it would have probably taken months, if not years, of regulatory review. A deal like this would have also possibly encouraged internal dissension.  There are also numerous technical problems with the newest commercial jet engine. Taking over such a business would have resulted in sustained losses for some time to come. At the same time, it is anticipated that the combined company would have faced hostility from very powerful customers like Boeing and Airbus, both of which have already raised concerns regarding the deal. All said and done, it seems like United Tech has definitely helped save Honeywell investors this time around.

One thing to keep in mind from the off is that Honeywell outperforms United Tech in almost every aspect. For example, the company beats UTC in important financial metrics like cash flows and revenue growth. This is poised to improve even going forward. The sheer scale of operations do not allow great growth opportunities, however, it is anticipated that Honeywell could grow at around 1.66%, while its rival could grow at about 1.05% in 2016. Furthermore, Honeywell has engaged in many acquisitions over the last few quarters. In 2015, the company snagged a meter business Elster and a satellite equipment maker COM DEV, and it seems unlikely that this momentum is going to slow down any time soon. Already, in 2016, the company has acquired a fire and intrusion equipment maker Xtralis. ^[2]

See our complete analysis of Honeywell here

Honeywell CEO, David Cote, recently mentioned that the company will not pursue UTC any further. They have also ruled out a possibility of going hostile against its main rival. ^[3] All said and done, this clarity could now allow the company to move on and focus more on smaller acquisitions that can lead to better growth opportunities without burning a hole in company funds. With more key acquisitions, the disparity in growth rates between the two companies could surely increase even further going forward.

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1. Honeywell Saved by United Technologies, www.seekingalpha.com [↩]
2. Honeywell or United Technologies, www.seekingalpha.com [↩]
3. Honeywell CEO: We Will Not Go Hostile With UTX, www.cnbc.com [↩]