Neal St. Anthony/On Business: Without GE, Honeywell might be headed for breakup
Neal St. Anthony
Tuesday, June 26, 2001
The 15-country European Commission soon is expected to formally reject General Electric's $45 billion stock offer for Honeywell International.
Honeywell, which moved its headquarters from Minneapolis to New Jersey in late 1999 as part of its merger that year with the former AlliedSignal, remains
"optimistic" that the deal will be approved. The company adds that it's "prepared for any outcome."
One analyst joked Monday that there's more chance of Elvis returning than of the EU approving a deal.
Honeywell CEO Mike Bonsignore faces tough options if that's the case. Steve Roorda, an analyst at American Express Financial Advisors, believes that against the
backdrop of an earnings decline, a slowed economy, turmoil from layoffs and the long wait for the fate of the GE offer to be decided, Honeywell's board of directors
might:
Peddle the company, perhaps to United Technologies, the original suitor for Honeywell last fall after Bonsignore wound up in Wall Street's doghouse after earnings
fell short of optimistic projections.
But don't expect United Technologies to offer the $50 per share it planned before huge GE topped it with a $55 offer last October.
"I think $45. Honeywell's numbers are lower this year," Roorda said.
ALSO INSIDE:
European officials back chief regulator on GE-Honeywell deal.D3
Liquidate the company "piece by piece" in the event United Tech or other buyer doesn't come forward for the weakened conglomerate.
Regroup and and go forward independently, the least likely option.
"That board is divided and I don't really know how [Bonsignore] stands," Roorda said. "But most of these deals that I've seen get broken up ... it takes two-plus years to
get things back on track. Things grind to a halt. There's management turmoil. People leave while you're trying to be acquired."
A fine state of affairs, but it illustrates the point that big-bang mergers often don't work.
Salomon Smith Barney last week lowered Honeywell's 2001 earnings estimate to $2.50 a share from $2.85, citing, among other things, "possible internal disruptions
caused by the [GE] deal's apparent collapse."
Salomon said the stock is properly priced in the high $30s but might drop if the company decides to go it alone.
Honeywell's stock trades well below the level it hit before the 1999 acquisition premium it gained on the high hopes over the AlliedSignal deal.
By contrast, Graco and Donaldson Co., two steady, well-run Minneapolis-based manufacturers have turned in a better stock performance since 1999.
It's most likely Honeywell's board will peddle the company ASAP to appease the arbitrageurs and angry shareholders who now control the stock.
Bonsignore's bid to more than double Honeywell in size to $25 billion in sales, integrate a huge merger and hit 15 percent, quarter-over-quarter earnings increases,
proved too long a shot. Honeywell's internal expansion plan before the Allied deal called for smaller, strategic acquisitions within its business lines of aerospace systems,
building controls and security systems, former executives told the Star Tribune last fall.
"The legacy of Bonsignore at this point is naivete," said Fred Zimmerman, a professor of management and technology at the University of St. Thomas and a critic of
the AlliedSignal deal from the get-go. "We know a lot about mergers and these kinds of problems. Certainly you could see the AlliedSignal 'P&L' and a lot of fluff and
no-growth segments and little cash."
Can the Honeywell board blame this on the Europeans?
They can only blame themselves. Political risk is as much a consideration as economic and market risk. The Europeans have a history of defending their
aircraft-systems market.
Honeywell was a well-run, well-regarded, global company headed for $10 billion in revenue from its century-old headquarters in south Minneapolis before the Allied
deal. Bonsignore, one of the Twin Cities' best and most community-engaged executives, and his board of directors look much the worse for wear from their bout of
"mergeritis."
Pemstar to Russell 2000
Pemstar is the kind of technology stock that the anything-goes equity markets of recent years wouldn't have cared much about.
Pemstar was too substantive, with real customers, growth and profits.
Now, it's getting some attention from the more selective markets.
The Rochester-based electrical design, engineering and manufacturing company this month raised $80 million in a secondary stock offering. That offering follows last
August's initial public offering that raised $102 million.
The stock has actually eked out a small gain -- from $11 last August to $12 per share recently -- during a crushing time for the tech sector generally.
This morning, the fast-growing, profitable firm will announce that it has been named to the Russell 2000 Index, the benchmark index of companies under $1 billion
in market value compiled by the Frank Russell Co.
Pemstar has a current market value of $404 million.
Al Berning, 46, Pemstar's CEO, said the inclusion in the Russell 2000 is an endorsement of the company's growth track and should enhance Pemstar's visibility in the
investment community.
Berning said he considered it fortuitous that Pemstar was able to go public last August in a lousy market for technology stocks.
"We were fortunate to not go public during the frothy times of 1999 and early 2000," Berning said. "A lot of employees said they were hoping the stock would jump up
three or four times in value. I said, 'No, you're not.' The stock price has held up. We've learned a lot in this market."
A lot of hot-promise, no-profit tech stocks leapt from their IPO prices only to tank as the far-fetched nature of their business plans became apparent. The flameouts
left behind a lot of scorched investors.
Pemstar, which posted net earnings of $6.7 million, or 25 cents per share, on sales of $635.3 million in the fiscal year ended March 31, is a designer and manufacturer of
products for the likes of 3M Co., Honeywell, Guidant, IBM and Motorola.
"You move faster in high tech if you can leverage partnerships as opposed to doing all by yourself," Berning said. "We run our factories with six to 12 customers.
"In spite of the tech downturn, we're working hard ... and the opportunities are out there, particularly on the proj ect design and tech-development area."
Pemstar helps manufacturers improve efficiency by working with them on product development, design and manufacturing.
In a year of downward earnings revisions, Pemstar told analysts recently that its orders so far in 2001 give confidence that the company can meet consensus
expectations for a near doubling of earnings per share to 48 cents in fiscal 2002 on a double-digit increase in revenue.
Pemstar, founded in 1994 by former senior managers who ran IBM's storage-products operation at its big Rochester plant, employs about 4,000 people in 15 facilities
worldwide, including 800 in Rochester.
Directors and officers own about 12 percent of the stock.
Neal St. Anthony can be reached at 612-673-7144 or Nstanthony@startribune.com.
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