If Honeywell International Inc.’s pursuit of United Technologies Corp. doesn’t lead to a deal, don’t worry – there will be others.
Honeywell reportedly offered $108 (U.S.) a share in cash and stock – or about $105-billion including debt – for United Technologies, the latest salvo in talks that have stretched over the better course of the last year. For now, that may end up being as far as it goes. United Technologies rebuffed the overture because it believes antitrust objections will be insurmountable (more on that later).
But just the fact that these two giants held talks signals how important acquisitions have become to an industrial sector that’s run out of other ways to expand. Slow global growth is pressuring results and cost cuts are starting to reach their limits. Clearly, Honeywell is thinking about big acquisitions, but many others such as General Electric, Eaton, Emerson and Danaher also could start to feel pressure to strike significant purchases of their own.
For Honeywell’s part, it’s hard to think the company is just going to pack it up and go back to tiny sub-$100-million deals after throwing this blockbuster out there. It’s got plenty of M&A firepower (enough to pay for 39 per cent of its United Technologies bid in cash, according to Bloomberg data) and those growth concerns aren’t going away.
Honeywell will be hard-pressed to find a target of United Technologies’ magnitude that’s a good fit and doesn’t spark the same antitrust concerns, but there are a number of decent-sized opportunities that could go a ways toward jolting earnings growth. The list includes $3-billion flow-control equipment manufacturer Crane Co., $1.5-billion aircraft motion-control systems maker Moog and $5.5-billion heating, ventilation and air-conditioning company Lennox International, according to Credit Suisse’s Julian Mitchell.
The chief executive of Meggitt, a U.K.-based supplier of aircraft wheels and brakes, essentially put the company in play this week when he said in an interview he would be open to suitors that “came with a big enough cheque.” Meggitt has a market value of about $5-billion and has often been speculated as a target for both Honeywell and United Technologies. You could even throw Ingersoll-Rand, a $14-billion maker of HVAC systems, or Pentair, a $9-billion water pumps and filtration systems company, into the mix. Should Honeywell not be interested in these companies, there are probably a number of others that would be.
There’s General Electric, for one. The company has largely been focused on divestitures of late, having struck deals for the bulk of its GE Capital division and a $5.4-billion sale of its appliances business to China’s Haier. While there have been rumblings for a while now that GE could pick up oil-equipment assets divested by Halliburton and Baker Hughes as they seek regulatory approval for their merger, Honeywell’s talks with United Technologies may force the company to think a bit bigger. GE certainly has a good chunk of cash from all those divestitures.
The argument for a GE takeover of Rockwell Collins – another potential industrial target – is gaining traction, with shares of the $12-billion avionics company climbing about 4 per cent in the wake of the Honeywell news.
Other options for GE could include Pentair and Hubbell – a $5.4-billion maker of electrical components. Someone is probably going to end up buying Hubbell sooner or later. The company cleared a path for a takeover last year when it reclassified its stock to eliminate a dual-class structure and weaken the voting power of certain trusts. Stifel analyst Robert McCarthy said back in November that an Eaton purchase of Hubbell was the deal that made the most sense in the electrical equipment and multi-industrial sector.
There’s still a chance that something happens with Honeywell and United Technologies, too. Many analysts seem to agree with United Technologies that regulators would be inclined to block a combination, given the companies’ overlap in aerospace. Honeywell clearly feels differently to make repeated offers for United Technologies. And it’s worth noting that it was United Technologies CEO Greg Hayes who reportedly kicked off merger discussions last year, so he must see at least some logic to a deal.
“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,” he told CNBC on Tuesday.
One way to get around antitrust pushback may be to structure a transaction as a mega-merger with a mega-spin, similar to what Dow and DuPont are proposing to do. Honeywell and United Technologies could combine and then split their aerospace and building-systems technologies businesses into separate companies. Divestitures would still be needed in aerospace, but at least the total size of the company wouldn’t be as daunting.
Either way, the industrial sector is ripe with possible match-ups and it’s a space investors should keep an eye on going forward. As the saying goes, where there’s smoke, there’s fire.
Brooke Sutherland is a columnist at Bloomberg News.Report Typo/Error