United Technologies CEO: Honeywell Deal `Ain't Gonna Happen'by , , and
Gregory Hayes cites antitrust hurdles and customer resistance
Honeywell says regulatory concerns wouldn't derail a merger
Antitrust hurdles and customer resistance would make a merger with Honeywell International Inc. too difficult to get done, said United Technologies Corp.’s chief executive officer.
“It ain’t gonna happen,” Gregory Hayes said Tuesday on CNBC.
The companies have held exploratory talks about a potential tie-up that would rank among the aerospace industry’s largest deals. United Technologies and Honeywell have combined annual revenue in excess of $90 billion, selling wares spanning jet engines, thermostats and elevators.
Honeywell on Tuesday disputed Hayes’ suggestion that a deal wouldn’t pass regulatory muster and said the broader product offerings from the larger company would be good for customers. A merger might generate as much as $3.5 billion in annualized cost savings, Honeywell said in a statement.
“A combination would benefit our customers and enhance our ability to offer a more comprehensive and compelling suite of technologies to serve their needs,” it said. “Honeywell believes the combined company’s financial profile would be stronger than the highest valued peers in the multi-industry group today.”
Initial discussions began in April and continued during the year, Hayes said. Honeywell last week offered $108 a share for United Technologies, or about 22 percent more than the stock price at the time, a person familiar with the matter said. United Technologies’ shares fell almost 30 percent in the 12 months through Friday, before news of the talks emerged.
While United Technologies was cool to the overtures, Honeywell has no intention of making a hostile bid, the person said.
United Technologies and Honeywell have “tremendous” overlap between their businesses, and getting regulatory approval to merge would be “very hard,” Hayes said. Customers also would oppose a potential deal that would give the combined company considerable pricing power, he said. United Technologies was advised against a merger by multiple “blue-chip” law firms, he said.
“While no one would argue about the merits of putting these great businesses together, what became very apparent to us is it just cannot happen,” Hayes said. “There’s just no path forward that we could see.”
United Technologies fell 0.8 percent to $91.60 at the close in New York, paring Monday’s 4.7 percent advance and giving it a market value of about $77 billion. Honeywell declined 1.5 percent to $103.64, putting its market value at about $80 billion.
Large aerospace customers including the U.S. Defense Department, Boeing Co. and Airbus Group SE may oppose a deal because it would reduce competition, said Nicholas Heymann, an analyst at William Blair & Co. That would hurt efforts by Boeing and Airbus to squeeze savings from suppliers, he said.
“Those customers were probably not going to stand idly by,” said Heymann, who described the deal as “dead on arrival.”
About 70 percent of Honeywell’s sales are in United Technologies’ aerospace and building-solutions markets and as much as 15 percent of that could trigger regulatory concern because of “overconcentrated overlap,” Heymann said. Honeywell and United Technologies are the biggest producers of auxiliary power units, which allow an aircraft’s electrical systems to run while the jet engines are off.
Honeywell CEO Dave Cote has won praise from investors for slowly turning around his company, which was in disarray when he took over in 2002. The deal would be risky for Honeywell because of United Technologies’ struggles with the introduction of a new commercial jet engine and at its building elevator unit.
United Technologies stumbled last year as a strong U.S. dollar weighed on earnings. The company announced a $1.5 billion restructuring plan in December to cut costs and reduce its manufacturing footprint. Hayes reached an agreement in July to sell the Sikorsky helicopter unit to Lockheed Martin Corp. for $9 billion.
While the economics of a deal with Honeywell “could work,” the odds of its happening are less than 50 percent, according to Jeffrey Sprague, an analyst at Vertical Research Partners. The companies would likely have to divest some aerospace businesses to gain approval, he said in a note Monday.
“While this combination could create some massive cost-cutting opportunities, the revenue synergies seem limited,” Sprague said.
United Technologies explored an acquisition of Honeywell in 2000 but withdrew from discussions as General Electric Co. submitted a bid. The deal between GE and Honeywell was scuttled the following year by European regulators.