Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

You could be forgiven for overlooking it, but Honeywell did have some other news for shareholders last week besides its underwhelming sales outlook

Bad Tidings
Honeywell shares slumped by the most in about a month on Friday after the company cut its 2016 revenue target
Source: Bloomberg
Intraday times are displayed in ET.


The $88 billion company is splitting its automation and control division into two separate businesses, with one focused on safety and productivity products like rugged mobile computers, sensors and hard hats and another focused on building technologies like HVAC and fire-safety systems. For now, this is just an internal reorganization that Honeywell says will make each business more nimble and help streamline decision-making processes. And honestly, it makes a lot of sense -- safety goggles don't seem to have a whole lot to do with air conditioners. But could this be a prelude to a more significant breakup?

During his 14-year tenure, Honeywell CEO Dave Cote has spent much of his energy on acquisitions, both big and small, to help bolster the company's revenue growth and create cost-cutting opportunities. But he's also been willing to prune when needed, particularly lately. Honeywell announced plans in May to spin off its $1.3 billion-in-sales resins business and is also reportedly seeking buyers for its technology-solutions division, which may fetch as much as $450 million in a sale and does defense-contracting work.

Those could just be the beginnings of a larger shakeup at Honeywell. Cote has certainly shown a willingness to go big -- remember that $100 billion-plus United Technologies takeover bid just a few months ago? He's unlikely to try to tackle such a large purchase again with less than a year to go before he hands the CEO reins over to Chief Operating Officer Darius Adamczyk. But Cote has always had a chip on his shoulder about Honeywell's valuation, which he believes should be more in line with industrial competitors such as 3M and Danaher. A breakup could be one way to get there. 

Parting Ways
Honeywell is splitting its Automation & Control Solutions unit into two divisions
Source: Bloomberg

Honeywell probably wouldn't part with its safety business. That division is going to include the company's purchase of robotic-arm maker Intelligrated, a $1.5 billion deal it announced just weeks ago. Those operations also have a software bent that fits well with Honeywell's technological ambitions. (Adamczyk has said he wants to boost stand-alone software sales to as much as 10 percent of the company’s revenue -- or about $5 billion over the next five years.) 

But Honeywell may be less attached to air conditioners, heaters and fire systems. In fact, earlier this year, the company reportedly explored selling its building-solutions business -- which now makes up a big chunk of what will be called the Home and Building Technologies division. At the time, the company was also pursuing United Technologies, so it's possible any divestiture was part of a plan to get antitrust approval. But there was a logic to parting with the business -- and there still is. At the very least, an internal separation certainly makes the process of selling the unit smoother, should Honeywell continue down that path.

Honeywell hasn't provided an operating income breakdown for its new divisions, but its automation and control-solutions business as a whole had an operating margin of about 15.8 percent in its most recent quarter, the lowest of its major units. There's reason to think the stand-alone HVAC and fire systems unit may have even lower margins. Ingersoll-Rand's climate-solutions unit had an operating margin of 12.7 percent last year, while heating and air conditioning competitor Lennox International  reported a total segment profit margin of 10.9 percent for 2015. 

Next Step?
Could Honeywell create value by selling its building-technologies business, now part of automation and control solutions?
Source: Bloomberg
Lennox International figure reflects the company's reported total segment profit margin for 2015.

Even so, as I noted in February, similar companies -- including the sprinkler and fire-protection system maker Tyco International and home-security monitor ADT -- have been commanding fairly high valuations from acquirers. Melrose Industries announced just this month that it's buying indebted HVAC company Nortek for $86 a share, just 6 percent shy of the stock's post-2009 bankruptcy high.

United Technologies was reportedly interested in Nortek, and arguably the company should make a counterbid. But perhaps the $88 billion maker of jet engines might like to acquire Honeywell's building-technologies division instead. United Technologies could combine Honeywell's building systems business with its own and spin the whole tidy package off, a deal which would help CEO Greg Hayes answer critics who say the company should be broken up. Ingersoll-Rand is another potential buyer.

Just something to think about as you shake off that slumping Honeywell share price. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net