No-one else could have done it. Only General Electric chairman Jack Welch could have persuaded Honeywell to reject one merger proposal, accept another, and then sell the idea of the world's largest industrial merger to a Wall Street enamoured with the new economy of technology stocks - all within 72 hours.
Welch's reputation for making mergers work, and making companies profitable, was instrumental in making the GE/Honeywell deal possible and making it acceptable to investors.
Honeywell chairman and chief executive Michael Bonsignore says Welch's agreement to stay on at GE's helm until the end of next year was an important factor in his board's decision to accept GE's offer over a merger proposal from United Technologies (UTC).
Equally important, according to Bonsignore, was Welch's track record in successfully integrating acquired companies. Honeywell's merger with AlliedSignal has not gone smoothly, at least from the viewpoint of Wall Street, which forced the company's share price down to the point where it became a take-over target (see chart).
GE's offer has several advantages over the merger agreement Honeywell and UTC had been negotiating for some time. First is the price. UTC is reported to have offered $40 billion, while GE's bid was initially valued at $45 billion, dropping to $42 billion when the company's share price fell slightly after the deal was announced.
More importantly, a merger with UTC was widely expected to require substantial divestitures to win anti-trust approval. The overlap between Honeywell and the small engines business of UTC's Pratt & Whitney Canada and the aircraft systems business of UTC's Hamilton Sundstrand was just too great to get past US and European competition authorities without major sell-offs. Analysts had put the scale of divestitures required as high as $2 billion.
Product compatibilityHoneywell is worth more to GE because there is a 90% overlap between the two company's business areas, but no overlap in product lines. "This is the cleanest deal you will ever see," says Welch.
This is best illustrated by the aircraft engines business. GE's commercial turbofan line ranges from the 8,700lb-thrust (39kN) CF34 for regional jets to the 115,000lb GE90 for widebody airliners, while Honeywell's runs from the 3,500lb-thrust TFE731 to the 9,000lb AS900 and is focused on light to medium business jets. The companies jointly produce the 6,000lb CFE738.
Even at their closest, the ranges do not overlap, Honeywell's AS900 business and regional jet powerplant fitting comfortably below GE's CF34 family of regional and business jet engines.
On the military engine side, Honeywell's F124 fits below GE's F414 and F110, while the company's TPE331 and T800 turboshafts fit below GE's CT7/T700 family. Honeywell also brings an auxiliary power unit business where GE has no presence whatsoever.
GE Aircraft Engines president James McNerney has been "pushing for Honeywell for some time", says Welch, which is hardly surprising as the result will be a product breadth that will match the combined engine ranges of UTC's Pratt & Whitney and P&WC. Even after its take-over of Allison, Rolls-Royce's engine range does not cover the power spectrum as completely as that of a merged GE/Honeywell.
In terms of aerospace products, GE has little else to bring to the party, having sold its aerospace business to Lockheed Martin several years ago. But the merger with Honeywell will bring GE a "nose-to-tail" capability no other company can match. From flight decks, through engines and systems to APUs, the merged company will be able to offer unrivalled packing of products and services to manufacturers and operators alike.
With similar synergies expected between the two companies' industrial, materials and transportation sectors, Welch sees the acquisition of Honeywell's $25 billion business base as a powerful opportunity for GE's powerhouse financial services unit.
"This increases our strength and flexibility and opens up much broader opportunities in financial services," he says.
GE Capital Aviation Services (GECAS) is a major lessor of airliners and financer of business jets and has a massive portfolio of regional jets on order. GECAS also owns a growing global aviation training services business which could benefit from the Honeywell merger.
Few, including Welch, anticipate significant anti-trust problems with the merger, in the USA or in Europe, and the deal is expected to close in February. Winning the approval of Wall Street is possibly a greater challenge, and one which Welch is already tackling head on.
Anticipating criticism that GE has used its massive buying power to acquire an "old economy" industrial company and not a "new economy" technology venture, Welch says: "Honeywell and GE are high-technology companies, with real earnings. This is a company with great technology that can use e-business tools to great effect."
More important to Wall Street will be whether Welch can make GE's profit-making formula work with underperforming Honeywell. The US aerospace industry has a mixed record of delivering on its promises for merger benefits, with Honeywell, Lockheed Martin and Raytheon all having returned disappointing post-merger financial performance.
GE's track record of successfully integrating acquired businesses was "critical" to the Honeywell board's acceptance of the merger offer, says Bonsignore. The company's own experience of merging with AlliedSignal has provided an object lesson in the punishment Wall Street will mete out if pre-merger promises are not fulfilled.
Led by Welch disciple Larry Bossidy, AlliedSignal was run very much in the GE mould and Wall Street expected the merger to bring the same profitability to underperforming Honeywell. Instead, under Bonsignore's leadership, the company has missed its financial targets and its share price has been punished severely.
The US aerospace industry is learning the tough lesson that its reputation on Wall Street has less to do with its product mix than with the performance of its leaders. Rather than punish Lockheed Martin for the sudden departure of new president Louis Hughes after barely six months in the job, Wall Street applauded the appointment of chief financial officer Robert Stevens as his replacement.
Stevens, as architect of the company's financial turnaround, has won Wall Street's respect. The same could not be said of Honeywell's Bonsignore. Even Welch, among the most respected of CEOs on Wall Street, admits: "The challenge will be to win 'most admired' a year from now."
Second windAs US aerospace industry consolidation finds a second wind, the ability to successfully complete the corporate integration that follows a merger is taking on paramount importance.
Lockheed Martin's problems surfaced after the aborted merger with Northrop Grumman, which was blocked by the US Government. In its headlong rush to lead the consolidation of the industry, the company had put off the integration of the many businesses it had already acquired.
The problem faced by GE is that Honeywell is still integrating the businesses that came together with its merger. What might help is that the former AlliedSignal was very much in the GE mould. Certainly Welch sees tremendous opportunity to improve Honeywell's financial performance and increase its operating margins to the level of GE's. He will also be encouraged by the fact that Honeywell shares his faith in the "Six Sigma" manufacturing quality measurement methodology.
The question now is how competitors will react. Already, Litton Industries has put its Advanced Electronics business - Honeywell's competitor in inertial navigation - up for sale. And Rockwell Collins - Honeywell's rival in commercial avionics - has announced plans to buy displays specialist Kaiser. Both moves have been in the works for some time. But so had Honeywell's UTC merger plan.
Welch first heard of the UTC/ Honeywell deal at 16:30 on Thursday, while standing on the floor of the New York Stock Exchange. By 10:00 the next day, GE had presented a deal attractive enough to cause Honeywell to break off talks with UTC. Such lightning-fast decision making could change the face of aerospace.
Source: Flight International
