How Honeywell turned the tables on United Tech

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Honeywell International Inc (HON.N) Chief Executive David Cote was sporting the casual jeans and sweater he often likes to wear in the office when he was visited by his then-counterpart at United Technologies Corp (UTX.N) in 2012, Louis Chenevert.

With Honeywell's stock trading at around $55, Chenevert had come to discuss offering $65 per share to merge the two U.S. aerospace and automation giants.

The idea was not new. The two companies had flirted with it for years, even before General Electric Co's (GE.N) failed bid to acquire Honeywell in 2000. But the talks never advanced beyond initial approaches.

That time was no different. Cote responded negatively, telling Chenevert he believed Honeywell's stock would be worth $100 in a few years.

"He was proven right.While Honeywell's stock has risen more than 80 percent since then, and is near all-time highs, UTC's stock has risen only by a third, and is down a third from its 2015 peak.Cote, 63, sensed an opportunity to turn the tables by unveiling a $90.7 billion bid this week"He was proven right.

While Honeywell's stock has risen more than 80 percent since then, and is near all-time highs, UTC's stock has risen only by a third, and is down a third from its 2015 peak.

Cote, 63, sensed an opportunity to turn the tables by unveiling a $90.7 billion bid this week.

Even after running Honeywell for 14 years, Cote's appetite for the top job is undiminished. He proposed a deal in which Honeywell would be the buyer and lead the merger, with Cote holding both CEO and chairman titles of the combined company.

This account, based on two sources briefed on the meeting and public filings, shows why Honeywell, which had previously shied away from a deal, was happy to confirm its interest in UTC this week from a position of strength. It also illustrates the challenges UTC now faces in resisting a deal.

"It is very opportunistic of Dave.

I don't blame him, but it's not going to happen," Greg Hayes, UTC's CEO since 2014, said on CNBC this week.

UTC argues that a merger with Honeywell would face insurmountable antitrust obstacles and strong customer opposition, citing concerns expressed by Airbus Group SE (AIR.PA) and Boeing Co (BA.N). Honeywell says antitrust issues are limited and can be addressed through asset sales.

Honeywell has also argued that the combined company, which would have a market capitalization of more than $160 billion, would be able to offer a more comprehensive suite of products and services to customers, with the annualized cost synergies reaching $3.5 billion. UTC disputes that figure, and points out that the asset sales required to receive antitrust approval and customer concessions would destroy a lot of value.

"If Honeywell wants to buy at a full and fair price, then yes, I would want to sell," said Daniel O'Keefe, portfolio manager at mutual fund manager Artisan Partners, which owns a $212 million stake in United Technologies.

INVESTOR DAYS

Honeywell, which has a scheduled investor day on March 2, has no plans to go hostile with its bid, according to the sources. However, UTC's stock has been rising every day since Honeywell's approach was disclosed on Tuesday, and is now up 10 percent since then, as investors bet on a deal happening.

As a result, UTC will have to present a compelling standalone plan at its annual investor day on March 10 to keep its shareholders on board. The Hartford, Connecticut-based company has already been going out of its way to maintain investor support.

UTC removed Chenevert in late 2014 after he refused to consider a sale of storied helicopter maker Sikorsky, according to the sources.

"This account, based on two sources briefed on the meeting and public filings, shows why Honeywell, which had previously shied away from a deal, was happy to confirm its interest in UTC this week from a position of strength"Chenevert, who now works at Goldman Sachs Group Inc (GS.N), did not respond to requests for comment.

Chenevert was succeeded by Hayes, whose first act was to announce a strategic review of all options. He reached out to Honeywell again in April 2015 to explore a merger, but cooled on the idea after he saw the antitrust environment become more stringent and UTC's stock lost value on disappointing earnings.

UTC later sold Sikorsky to Lockheed Martin Corp (LMT.N) for $9 billion and agreed to use the proceeds to fund additional share repurchases.

BREAKING UP

At a time when peers such as General Electric Co (GE.N) have been slimming down to focus on core businesses, UTC has retained its diversity. It makes everything from air conditioners to elevators and fire equipment, to a broad range of aerospace equipment, including tires, cockpits and engines.

But UTC's businesses are not all faring equally. Its underperforming Otis elevator division, for example, is facing steep engineering and development costs as the company tries to refresh its product line.

In light of UTC's latest snub of Honeywell, it will also have to explain why separating its aerospace from its buildings divisions does not make sense.

Hayes has no intention of breaking up the company, according to a source familiar with his thinking. Instead, it will focus on initiatives such as its investment in its Pratt & Whitney turbofan engines.

"In terms of capital allocation and portfolio management, UTC has done a pretty good job of looking after shareholders and its assets. But you could argue that the company could be broken up," Artisan Partners' O'Keefe said.

The fact that UTC and Honeywell have the same top six shareholders - Vanguard Group, BlackRock, MFS Investment, Wellington Management, JPMorgan Asset Management and State Street - means that both companies are largely playing to the same audience.

Vanguard, BlackRock, JPMorgan and Wellington declined to comment. MFS and State Street did not respond to requests for comment.

The advanced notice period to propose board members at UTC's annual meeting expired on Jan.

"I don't blame him, but it's not going to happen," Greg Hayes, UTC's CEO since 2014, said on CNBC this week.UTC argues that a merger with Honeywell would face insurmountable antitrust obstacles and strong customer opposition, citing concerns expressed by Airbus Group SE (AIR.PA) and Boeing Co (BA.N)"28, so any activist investor would have to wait a year to submit a slate of board directors. As of Dec. 31, no major activist hedge fund was invested in the company's shares, according to Thomson Reuters data.

(Reporting by Andrea Shalal in Washington, D.C. and Michael Flaherty in New York; Additional reporting by Greg Roumeliotis in New York and Ross Kerber in Boston; Editing by Nick Zieminski)