Hostile Takeovers Rare in Defense World
WASHINGTON — After years of pursuing a possible deal, Honeywell has abandoned its hopes of acquiring United Technologies — at least for now.
On March 1, days after the two firms released dueling filings with the Securities and Exchange Commission, Honeywell announced it was no longer pursuing a deal with UTC. UTC spurned Honeywell’s $90.7 billion offer ($35.8 billion in cash and $54.9 billion in Honeywell shares), citing low valuation and anti-trust regulatory hurdles.
Speaking March 2 at the company’s investor conference, Honeywell Chairman and CEO Dave Cote said the deal would have created a lot of value for shareholders in both companies.
“We also thought that this would be a great chance to create a best of both, really excellent core growth portfolio,” he said. “But at the end of the day, they’re not interested, and if they’re not interested and that unwilling, we’ve got plenty of other stuff to do.”
By invoking concerns over the challenging regulatory environment, UTC made it clear that they weren’t simply holding out for a higher price, said Jeff Bialos, a partner at Sutherland Asbill & Brennan who specializes in mergers and acquisitions and previously served as the Pentagon’s deputy undersecretary of defense for industrial policy.
“This was designed to kill the deal, not as a negotiating effort,” he said. “If you were interested in the deal, why would you put out a detailed memo, drawing a roadmap for regulators on the problems with the deal?”
Anita Antenucci, senior managing director at Houlihan Lokey, said UTC’s decision was likely shaped by its recent experiences with anti-trust regulators during its 2012 acquisition of Goodrich Corp. and its divestiture of Sikorsky Aircraft last year.
“They’ve had lots of opportunities to have very direct conversations with the authorities,” she said. “Moreover, they know exactly what the authorities were told by others in the industry” — possibly including Boeing and Lockheed Martin — “when they went through the Goodrich transaction.”
In this case, two major customers, Airbus and Boeing, weighed in on the Honeywell-UTC discussions. Airbus CEO Tom Enders told Reuters that the proposed deal was not in Airbus’ best interest. Boeing, another major customer, released a statement saying it anticipated taking a “very close look” at the deal, as it would with any potential combination of tier one suppliers within the aerospace and defense industry.
In its public rebuttal of Honeywell’s overtures, UTC indicated that changes to the regulatory environment during the last year made it likely that the deal would be blocked outright.
Antenucci said she didn’t think government oversight of merger and acquisition activity has changed dramatically.
“I don’t think that the regulatory environment is ever really that predictable. The only way to really know what regulators think of a deal is to put it to them,” she said. “Their reaction will also be dynamic based on the input that comes from the rest of industry.”
UTC’s rationale for rejecting Honeywell’s offer doesn’t have to assume that regulators will block the deal, she said.
“Someone trying to decide whether to go down that path is probability weighting the damage, not just the possibility of saying no, but the damage that could be done versus the upside if the deal happens,” she said. “Many months of public uncertainty about the future of your company can do damage, even if in the end there would be some way they’d say yes.
Honeywell’s public overtures seemed designed to generate support from investors and shareholders, and led some to speculate that it intended to mount a hostile takeover, which are very rare in the defense sector.
“Defense customers don’t want perturbations in their program that affect cost schedule or technical performance,” said Bialos. “A hostile takeover is certainly a distraction that would not be welcomed by defense customers,” particularly in areas with large, sensitive programs.
Antenucci pointed to the many different parties that need to sign off on defense-related deals as another reason for so few hostile transactions.
“There are many, many sources of approval that are required to get a deal. Getting those approvals are always more likely when you’re doing it as a team, and you’re going and explaining the benefits of the transaction, whether that’s to your government customers, or your prime contractor customers, or a regulatory authority,” she said. “Hostile transactions in a world with so many parties required to approve a deal are nowhere near as likely to be as successful as a collaborative strategy.”
While Honeywell may have given up on acquiring UTC, acquisitions remains a key part of the company’s growth strategy. During his investor conference presentation, Cote insisted that just because Honeywell was prepared for a deal with UTC doesn’t mean that it will pursue another major target.
“Does this mean you now have your .450 elephant gun out and you’re just running around the world looking for stuff?” Cote asked himself on behalf of shareholders. “The answer is no.”
However, Honeywell spent $6 billion in 2015 on buying companies, which it expects to create a noticeable tailwind for revenue growth, and shows little indication of slowing its buying spree. On the same day it officially ended its pursuit of UTC, Honeywell also announced the acquisition of Movilizer and RSI Video Technologies.
“It’s plain Honeywell is aggressively interested in pursuing acquisitions,” said Bialos.