At Honeywell, It's Larry the Knife

With the failed GE deal and an aerospace tailspin, Bossidy's plan seems to be cut, cut, cut

Shortly after returning to Honeywell International Inc. (HON ) in July as chairman and chief executive, Lawrence A. Bossidy was taking questions from workers at a town-hall-style meeting at the company's Morristown (N.J.) headquarters when an employee asked him a seemingly innocuous question: Would Honeywell still have its annual picnic? Without missing a beat, the hard-nosed CEO shot back: "Hey, you've been on a picnic since I left."

The message was clear. The 66-year-old Bossidy is determined to revitalize the diversified manufacturing concern with the same intensity and drive that has marked his career through a series of senior jobs at General Electric Co. (GE ); at AlliedSignal, where he ran the show; and at Honeywell itself, where he was chairman for a scant four months after Honeywell and AlliedSignal combined. Now, back from retirement to lead Honeywell after its long-planned merger with GE fell apart, Bossidy must get a thoroughly demoralized company on its feet again. He also has to restore its depleted management ranks, convince Wall Street that the company can be a moneymaker, and recruit a seasoned and respected successor--all before next summer, when he again plans to retire.

Bossidy has little choice but to move aggressively. "He came into a broken company with broken businesses," says Roger R. Threlfall, senior managing analyst at Honeywell investor Dreyfus Corp. "This company has been at a standstill, and he needs to get it moving again." By the end of this year, Bossidy's tough restructuring plan calls for Honeywell to have taken $2.2 billion in charges, largely to cover the cost of slashing 15,800 jobs--13% of its workforce--and shuttering 51 manufacturing facilities. In Honeywell's crucial aerospace business alone, it will lose 5,300 employees, reducing its ranks by 14%, to 32,000. Bossidy also plans to unload underperforming businesses with $2.5 billion in sales, including a brake-pad unit and a pharmaceutical chemicals operation. "His strategy is to cut, cut, cut," says Steven Roorda, senior equity analyst at American Express Financial Advisors Inc., a Honeywell shareholder. "And he's very good at that."

UP IN THE AIR. Like many executives, Bossidy's job was complicated by the September 11 terrorist attacks. Honeywell's sophisticated aviation-systems and components businesses account for about 40% of sales and 60% of operating profits. Now its prime customers, which include Boeing Co. and many major airlines, are hurting.

Certainly, Honeywell will gain some opportunities by helping airlines upgrade security and by seeking more military and space-related business. Noncommercial business currently accounts for about a third of aerospace sales. Honeywell is a big subcontractor on Lockheed Martin Corp.'s (LMT ) new Joint Strike Fighter, for example. That contract is expected to generate $5 billion in revenue over the next 20 years. Honeywell will provide components, including the plane's wheels, brakes, and onboard oxygen system. But that won't be enough to offset the falloff in commercial aerospace demand and weakness in other industrial businesses, which are being hurt by the downturn. In fact, Deutsche Banc Alex. Brown Inc.'s Harriet C. Baldwin figures Honeywell's sales will slip 6% this year, to $23.6 billion, from $25 billion, while aftertax operating income, which excludes restructuring charges, will tumble 27%, to $1.7 billion, from $2.3 billion.

So Bossidy is also pushing hard for productivity improvements. He is a longtime proponent of Six Sigma, the process for eliminating manufacturing defects that was made famous at GE. That tool helped generate 31 consecutive quarters of double-digit earnings growth for him at AlliedSignal.

Bossidy is hustling to get more Honeywell operations online. For example, Honeywell's heating, ventilation, and air conditioning systems unit will soon start using handheld devices rather than handwritten invoices to transmit maintenance and repair requests to its 1,500 field technicians. That's expected to save $4 million annually. Bossidy says total productivity improvements and cost cutting will save Honeywell $1.3 billion next year--enough to offset the slowdown in aerospace and other businesses.

DISTRACTION FACTOR? Honeywell shares, recently $31.70, have fallen 9.7% since Bossidy's return on July 3, while the Dow Jones aerospace index has declined 15.9%. Not everyone, however, buys into Bossidy's program. Prudential Securities Inc. analyst Nicholas P. Heymann says he is skeptical about the savings targets. For one thing, the company itself admits to only $550 million in savings this year, far less than it had wanted. And Heymann believes that big productivity increases next year could fall victim to slack demand and soft prices. Some investors also worry that Honeywell's cuts will be so deep that it won't be able to develop and deliver new products when the economy recovers. Bossidy, of course, says that future growth won't be compromised. He adds that this year's relatively scant savings resulted from the distraction of Honeywell's aborted takeover by GE, when the company was more focused on integration planning than executing its cost-cutting strategies.

At the same time that Bossidy is cutting costs, he is also trying to stabilize Honeywell's management ranks. The company saw significant defections during the merger with AlliedSignal in 1999. The new company, with old Honeywell CEO Michael R. Bonsignore (who declined to talk with BusinessWeek) at the helm, was largely staffed with AlliedSignal managers. But after years under the focused and hard-charging Bossidy, some of them say that they felt adrift with the more laid-back Bonsignore. Bossidy personally conducted detailed quarterly reviews with business unit managers; Bonsignore would leave that job to two senior execs. The culture clash led to numerous executive departures. And the exodus continued after GE made its bid for the company in 2000. Bossidy acknowledges that with people unsure about whether they would have a job, they were operating "with one foot out the door."

The fallout from such management uncertainty is still being felt in parts of the company. In a key piece of the automation and control business, for example, Honeywell has lost share to competitor Emerson Electric Co., which in 1998 came out with a cheaper system to monitor and control various manufacturing processes. "We were able to run out and establish a lead," says John M. Berra, executive vice-president at Emerson. Bossidy has since tapped a Honeywell veteran to overhaul the automation and controls business. Eight of the top 13 managers in the operation are now new to Honeywell or transfers from other units. Companywide, Bossidy has lured back several former executives and successfully lobbied to keep some 50 others from leaving. Despite those efforts, the company concedes that gaps in middle management still exist.

SHOES TO FILL. Bossidy himself returned only to help Honeywell out of its current crisis. Who will succeed him? Robert P. Luciano, former chairman of Schering-Plough Corp. and a Honeywell director, says Bossidy discussed several internal and external candidates for the job at a September board meeting. He adds that Bossidy is already meeting with potential successors. While Honeywell is tight-lipped about the search, one industry source figures Bossidy may try to lure an executive from Emerson Electric (EMR ), United Technologies (UTX ), or GE, where Bossidy spent 34 years before moving to AlliedSignal.

Of course, Bossidy could just end all his headaches by selling Honeywell. Its avionics business had been a lure to GE and also enticed UTC to make a run at the company. But with the aerospace industry in a tailspin, that seems unlikely--at least for now. Besides, Bossidy is adamant that the company won't be sold on his watch. "You can write this out of the playbook for some time," says George David, CEO at UTC, speaking of any prospective Honeywell sale. "We're talking years." That's why Bossidy must convince Wall Street that Honeywell has a plan that will allow it not only to survive, but to prosper, too.

By Amy Barrett in Philadelphia, with Diane Brady in Hartford, Conn.

— With assistance by Diane Brady

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