Will Honeywell International Inc. and United Technologies Corp Merge?

Honeywell and United Technologies Deal a Win for ShareholdersHoneywell and United Technologies Deal a Win for Shareholders

Wall Street loves the idea of a merger between Honeywell International Inc. (NYSE:HON) and United Technologies Corporation (NYSE:UTX). The signs are clear. Over the past week, UTX stock has overcome the January blues, trading around $96.00—its highest level of the year. But growing rumors of a merger with Honeywell could send UTX stock soaring. Meanwhile, HON stock is trading above $107.00—its highest valuation ever.

United Technologies has so far rejected Honeywell’s advances, fearing a veto from antitrust authorities. Aircraft manufacturers Airbus and Boeing, in particular, source key components such as avionics and engines from Honeywell and United Technologies. Together, UTX and HON stock would become too much of a one-stop shop for all things aerospace. Honeywell rejects this argument, noting that the combined UTX-HON union would result in a behemoth with revenue of around $95.0 billion, a Silicon Valley-like market capitalization of nearly $160 billion, and an Industrial Revolution-level of 325,000 employees.

Honeywell has sweetened the deal to UTX stock shareholders. It said they would receive $42.63 a share in cash, plus 0.614 shares of Honeywell per UTX share. Honeywell added that investors would see double-digit earnings-per-share (EPS) growth. (Source: “Honeywell-UTC Bad For A&D, But Good For Wall Street,” Aviation Week, Feb.26, 2016.)

China’s economic slowdown, reduced infrastructure spending, and a higher U.S. dollar have left UTX stock exposed. United Technologies takes on large projects and future performance affects United Technologies stock. The group, which owns Otis Elevators, had enjoyed a boom due to sales for Chinese buildings. Otis and Carrier air conditioning, two UTX units, won millions in contracts in the Persian Gulf with its construction boom.

In 2015, United Technologies was looking for a partner. Now, it has become a target. Indeed, either UTX sells more of its valuable pieces, such as Sikorsky (now part of Lockheed Martin), or it finds a partner to protect itself and its investors.

Unlike UTX stock, Honeywell had a bullish 2015 and HON stock is soaring to uncharted heights. Honeywell wants the marriage. It’s just one step away from kneeling to propose, diamond ring and the whole nine yards.

This week, Honeywell reiterated that a merger with United Technologies makes sense, creating a formidable group. Honeywell chief executive Dave Cote took the issue directly to investors by publishing the February 19 presentation to UTX management about the structure and logic of a potential deal. (Source: “Honeywell abandons $90bn pursuit of United Technologies,” The Financial Times, March 1, 2016.)

However, UTX stock investors have hope yet. A revival of merger talks is likely. Honeywell has not said that its decision to abandon the merger with United Technologies is final. The antitrust concerns may turn out to be a temporary obstacle to a UTX and Honeywell merger, which investors would welcome.

RBC Capital Markets certainly believes in the ultimate likelihood of a United Technologies and Honeywell wedding: “Although Honeywell has backed off here, we still think that they have put [United Technologies] ‘in play’ and that this will ultimately be a benefit for [UTX’s] share price and valuation.” (Source: Ibid.)

According to CNBC, which first reported these negotiations, the discussions are recent. Honeywell made the approach and proposed a transaction that, if realized, would allow UTX shareholders to pocket a bonus: shares and additional cash. The antitrust worries have pushed UTX to stop the talks. (Source: “Honeywell, United Technologies held merger talks but UTX pulled out on antitrust worries,” CNBC, Feb.22, 2016.) Nevertheless, UTX remains an appetizing morsel in the industrial sector.

Honeywell says it won’t go all “hostile” on United Technologies. Nevertheless, while it has walked away from a HON-UTX stock merger for now, the floodgates on a potential UTX merger are open. Honeywell may yet return with an offer or another industrial conglomerate may try to sweep UTX stock off its feet. Still, the merger genie is out of the bottle and after United Technologies.

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