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 In an unusual move, the two companies sparred publicly about a deal
that, if realized, would create one of the largest U.S. companies
with almost $100 billion in annual sales.
Major customers also weighed in, with Boeing saying it would careful
scrutinize a deal and underscoring the need for "healthy
competition" in its supply chain.
United Technologies Corp <UTX.N> said the two companies had talked
about a possible combination for years.
But it said the regulatory environment had changed and a merger now
would either be blocked outright, or any synergies would be far
outweighed by regulatory delays, required divestitures, and customer
concerns and concessions.
"It would be irresponsible for UTC to move forward with the proposed
combination," the company said in a regulatory filing.
United Tech's filing came hours after Honeywell <HON.N> spelled out
the details of its $90.7 billion offer to acquire United Tech,
putting pressure on the reluctant aerospace supplier to come to the
negotiating table.
Honeywell Chief Executive Officer David Cote, in a presentation he
made to United Tech's top executives last week and then made public
on Friday, said a combined company would have double-digit earnings
growth after it slashed costs.
United Tech shares, part of the Dow Jones industrial average <.DJI>,
closed 0.4 percent lower at $97.69. That is well below Honeywell's
$108 per share offer, suggesting Wall Street, like United Tech, was
skeptical about the combination.
"Game on.... There is clear momentum in this saga, and a ratcheting
up of the tensions," wrote Rob Stallard with RBC Capital Markets. He
cited concerns about business overlap, and said there were
unresolved questions about achievable synergies, management roles,
cultural fit, and merger premiums.
Jeff Bialos, a law partner with Sutherland Asbill & Brennan and a
former senior Pentagon official, said he was not convinced that the
regulatory environment was as tough as United Tech said.
Divestitures were always possible, but United Tech likely did not
want to cede control to Honeywell, he said.
United Tech is the parent of Otis elevators, Carrier air
conditioners and Pratt & Whitney jet engines, while Honeywell makes
thermostats, auto turbochargers and airplane cockpit electronics.
Areas of overlap between the companies include small aircraft
engines, airplane power units and environmental systems as well as
wheels and brakes, CRT Capital analyst Peter Arment said in a note
to clients.
Honeywell would likely have to divest many assets and raise its
offer before a deal was done, Arment added.
U.S. and European regulatory scrutiny would push the deal's
completion well into 2017, and potentially into 2018, according to
sources familiar with the deal.
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Honeywell said its offer includes $42.63 in cash and 0.614 of its
shares for each United Tech share. The proposal represents a 22
percent premium to United Tech's closing price on Feb. 19, the last
trading day before the talks were made public.
(http://bit.ly/1oMD1tg)
Honeywell shares closed 1.1 percent lower at $103.03.
The companies said earlier this week they had held merger talks but
did not offer details. United Tech had said a deal would "face
insurmountable regulatory obstacles."
"It just cannot happen," United Tech CEO Greg Hayes said on CNBC
television this week. "There's just no way to get it done."
A merger could either be blocked outright or made conditional on
significant divestitures after a lengthy and disruptive review that
would destroy shareholder value, United Tech has said.
Honeywell, however, said potential regulatory issues would be
"easily resolved."
In its presentation, Honeywell said a deal with United Tech would
save $3.5 billion each year by cutting spending on raw materials,
consolidating real estate and in other ways. Under the offer, Cote
would lead the combined company.
United Tech said the merged firm's revenues could fall by $5 billion
to $10 billion since the change in “control” would force it to
reopen contracts with major aircraft makers, said a source close the
matter. That would allow those customers to negotiate lower prices,
or even find new suppliers, the source said.
A merger would create a behemoth responsible for much of the
equipment on commercial airliners and many military aircraft,
raising concerns for companies like Airbus <AIR.PA> and Boeing Co
<BA.N>, as well as the Pentagon.
The combined company would generate about 28 percent of sales from
commercial aerospace customers, and 13 percent from the defense and
space sector, according to Honeywell's presentation.
(This version of the story corrects third paragraph to customers
from suppliers)
(Additional reporting by Greg Roumeliotis in New York; Writing by
Nick Zieminski; Editing by Saumyadeb Chakrabarty, Clive McKeef and
Tom Brown)
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