Aerospace & Defense

Honeywell Made United Technologies an Offer It Could Easily Refuse

Calling the combination “compelling,” Honeywell International Inc. (NYSE: HON) Chairman and CEO Dave Cote tried last week to convince United Technologies Corp. (NYSE: UTX) Chairman Edward A. Kangas and UTC CEO Gregory J. Hayes that a $90.7 billion merger between the two industrial giants was a “unique opportunity” to grow revenues and earnings at a time when the financing market is “highly favorable.” UTC was not convinced.

On Friday morning, Honeywell released a copy of the presentation that Cote gave to Kangas and Hayes on February 19 and that UTC declined on February 22 saying that such a merger “would face insurmountable regulatory obstacles and strong customer opposition.”

One customer, Airbus, proved that point when CEO Tom Enders said that he did not see such a combination as being in the best interests of Airbus. Honeywell and UTC are among the airframe maker’s 20 largest suppliers. Boeing Co. (NYSE: BA) said it would want to take a “very close look at the potential impact” of such a merger on itself and its customers.

And because Honeywell and UTC are both suppliers to the U.S. Department of Defense, the Pentagon would want to weigh in. Late last year federal government agencies, including the Pentagon, were said to be drafting a proposal to allow regulators to block proposed mergers on national security grounds as well as for antitrust concerns.

As for the regulatory issues, while they may not be “insurmountable,” they would certainly be distracting, and probably for a very long time. Honeywell and UTC combined touch virtually every commercial plane from the nose to the tail and from wingtip to wingtip.

Half of UTC’s 2015 revenues came from its two aerospace businesses, Pratt & Whitney and Aerospace Systems. That’s about $28.5 billion. Honeywell’s aerospace business brought in about $15 billion of the company’s 2015 revenues of $38.6 billion.

According to The Wall Street Journal, Boeing and Airbus accounted for about $10 billion of UTC’s 2015 revenue, and Airbus alone generated about 40% of Pratt & Whitney’s $14.22 billion revenues.

One other catch in Honeywell’s proposal: Cote becomes chairman and CEO of the combined company. Presumably the parachutes for Kangas and Hayes are platinum, but that’s not discussed on the slides released Friday.

Shares of UTC traded up about 1.2% Friday, at $99.25 in a 52-week range of $83.39 to $123.55.

Honeywell shares traded down about 0.6%, at 103.50 in a 52-week range of $87.00 to $111.86.

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