Conglomerates

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

For any new CEO dealing with a nettlesome activist investor, the ideal outcome has to be a transaction that excites the market without entirely giving in to the activist's demands. That way some opportunistic investor doesn't get all the credit, but everyone still goes home happy.

This may be how it plays out at Honeywell International Inc.

In Need of a Boost
Honeywell's organic growth has underwhelmed even as former CEO Dave Cote continued to improve margins. Boosting core revenue is a top priority of his successor Darius Adamczyk:
Source: Bloomberg Intelligence
Including the impact of the Alstom acquisition, GE's organic growth was 1 percent in 2016

The industrial giant is reportedly on the cusp of announcing a breakup -- just not the kind Dan Loeb's Third Point LLC started pushing for in April, the month after Darius Adamczyk took over as Honeywell's chief. Instead of separating out the aerospace division, as Third Point proposed, Honeywell plans to spin off some of its non-core assets in a move that would create at least two new publicly listed companies, according to Reuters. (Honeywell declined to comment on the report.)

Coming Up Short
The higher stock-price multiples that companies such as 3M and Danaher command have historically eluded Honeywell -- will the new CEO's breakup plan change that?
Source: Bloomberg
Note: Danaher has traditionally been used as an aspirational multiple for Honeywell, but these days it's more of a health-care company than an industrial.

The direction Honeywell is reportedly taking is in line with what Gadfly has suggested and gets to the root of the company's discordance. Third Point has argued that Honeywell's aerospace business should go because it's the "chief cause" of its discounted valuation. However, aerospace is also the biggest revenue driver and one of Honeywell's most profitable units, even as its exposure to the business-jet market has become a sore spot. 

There may be a better deal opportunity for the aerospace division down the road -- when General Electric Co. is ready, as our industrial columnist Brooke Sutherland has written. GE, which just shook up its top ranks, is combating costs to recharge cash flow as it works to appease its own activist. Therefore, GE doesn't have the resources to merge Honeywell's aerospace division with its own, but such a deal would make a lot of sense in the future. Honeywell may be hanging on to the business until that moment arrives. 

As far as the smaller pieces Honeywell may divest, the only detail reported thus far is that the company is considering placing the turbochargers business into one of the newly created entities. This is good news, as Honeywell could never quite find the right home for turbochargers within the conglomerate. Others it could part with include the volatile UOP petrochemical business or the home-and-building technologies unit, which could fit well with United Technologies Corp.'s HVAC unit. 

Misfit
Honeywell's turbochargers business, which supplies the auto industry, is awkwardly tucked inside its aerospace division and may be one of the first to go in a breakup
Source: Bloomberg

These moves shouldn't only lift Honeywell's valuation, but they may also aid Adamczyk in his mission to increase software-related sales and bring a more entrepreneurial investing mindset to the conglomerate. In turn, Honeywell investors may be less put off by fluctuations in profit if this refreshing shift toward more nimble growth shows signs of success. 

--With assistance from Gadfly's Brooke Sutherland

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

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

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