The Honeywell International sign is outside the company’s former worldwide headquarters in Morristown, New Jersey.
Daniel Barry | Bloomberg | Getty Images
Activist investor Elliott Management owns more than $5 billion in stock. honeywelland urges the industrial conglomerate to be split into two companies.
Elliott said Honeywell is dividing its operations along two main business lines: aerospace, which supplies engines and avionics to military and commercial users, and automation, which supplies sensors and control systems to industrial users. I think it should.
“The conglomerate structure that once suited Honeywell is no longer suitable,” Elliott managing partner Jesse Cohn and partner Mark Steinberg said in a letter Tuesday. Mr. Elliott believes that splitting Honeywell into two companies could generate returns of up to 75% over the next two years.
Honeywell CEO Bimal Kapoor was appointed to the top job in 2023. He has made no secret of his interest in M&A, acquiring billions of dollars worth of companies in 2024, even amid a broader M&A downturn.
Cohn and Steinberg wrote that Honeywell’s carefully assembled businesses have driven “consistent” margin improvements to date. But Honeywell has underperformed its peers since 2019, which both companies directly blame on a messy corporate structure, a difficult portfolio and poor investor messaging.
A Honeywell spokesperson said the company and its board “recognize and appreciate the perspectives of all of our shareholders.” The spokesperson also said that while Mr. Elliott had not communicated with the company prior to Tuesday’s letter, Honeywell looks forward to engaging with the activist.
Honeywell stock rose as much as 5% in Tuesday trading.
Elliott typically conducts extensive research before making an investment, and in this case he said he spoke with “more than 200” former employees and industry experts. But Elliott said it also hired investment bankers and consulting firms to advise it on investments.
It’s relatively unusual, but not unheard of, for activists to work with bankers who prefer to advise corporations rather than dissidents. Elliott himself partnered with UBS in 2017 when he ran a campaign with NXP Semiconductors. It’s unclear which investment banks Elliott is working with.
“Simple solution”
Cohn and Steinberg noted that Honeywell has a “collection of best-in-class companies” and emphasized that the company’s aerospace business is the “crown jewel.” But Mr. Elliott pointed out that Honeywell’s best years were under former CEO David Cote, and while activist investors stopped short of criticizing Mr. Kapoor, Honeywell He said the company had “struggled” to meet basic performance expectations in recent years.
The “simple solution” to Honeywell’s woes is to break up the business, Elliott wrote.
One of the issues Mr. Elliott highlighted was the inconsistency in how Honeywell allocated its M&A budget. Elliott pointed out that the company’s cash cow, the aerospace industry, has received only 10% of Honeywell’s M&A dollars over the past 20 years.
Splitting up is easier than at other companies because both companies already have their own divisional CEOs and back-office functions are largely separate.
The historical argument for conglomerate structures was that heterogeneous companies could save costs by centralizing back-office functions such as legal, IT, and human resources into core corporate functions. However, Honeywell has primarily separate teams and does not fit that requirement right away.
Conglomerate structure becomes disadvantageous
David Cote, former chairman and CEO of Honeywell, spoke at the World Economic Forum in Davos, Switzerland.
David A. Grogan | CNBC
Elliott’s recommendations reflect broader trends in industrial business. general electricArguably the quintessential conglomerate, the company first announced in 2018 and finally finalized its plan to split its empire into three parts earlier this year. Like other conglomerates 3M and johnson controls You may have sold your business or spun it off into a separate company.
Elliott’s request to Honeywell was one previously made by Honeywell. The company has been in great position to pursue divestitures and sales in recent years. marathon oil. Other companies targeted by Elliott are also selling assets or breaking up. Prior to this, the company conducted multiple campaigns aimed at splitting the steel giant Alcoa.
“We believe that the path we are proposing is not new and that many have already proposed it to Honeywell’s board and management,” Cohn and Steinberg said in the letter. Ta.
Gone are the days when investors focused on conglomerates. GE Aerospace and GE Vernovaand power generation businesses both outperformed the S&P 500 this year. This outperformance came after years of undervaluation and decline during the days when GE operated as a conglomerate.
Elliott believes that if Honeywell’s two main businesses were independent companies, they would both be worth $100 billion. Several other businesses could be divested as well, and Mr. Kapoor has already begun considering a sale of Honeywell’s personal protective equipment business and a spinoff of the company’s Advanced Materials business.
