Lessons from the GE-Honeywell Non-MergerPublished: July 04, 2001 in Knowledge@Wharton
It looked as if it would be a marriage made in heaven when General Electric announced plans last year to acquire Honeywell International. But after a protracted and rocky engagement, these star-crossed corporations will not be walking down the aisle.
Both companies were blissful when the antitrust division of the U.S. Justice Department gave its blessing to what would have been the largest industrial acquisition ever. When the bride and groom sought approval from the European Union, however, the EU’s competition commissioner, Mario Monti, vetoed the betrothal. At the last minute, GE made concessions to the EU and the 20-member European Commission, the EU’s executive arm -- and Honeywell made concessions of its own to GE -- but the overtures were not enough to salvage the relationship.
It is natural to look for someone to blame when a high-profile transaction goes awry, especially a $42-billion deal involving major players in an important sector like aerospace. But faculty members at Wharton and the Goizueta Business School of Emory University say there is no one person, government agency or company to whom an accusing finger can be pointed. There are, though, plenty of lessons to be learned by everyone involved in the case, including regulators who do not see eye to eye on antitrust theory, and by other multinational corporations thinking of tying the knot in the future. It is also clear that Honeywell, at least in the short term, will suffer more from the failed deal than GE.
"My sense is one of the reasons why this has gone so badly wrong is that the parties didn’t do their homework," says Wharton’s Edward T. Swaine, a professor of legal studies who conducts research on international antitrust law. "I think it’s odd if GE and Honeywell were surprised by the road the EC took. I don’t agree with the EC on the substance of its decision, but I can’t say I was terribly surprised."
It was stunning news when GE, based in Fairfield, Conn., announced last October that it had reached an agreement to acquire Honeywell. Jack Welch, GE’s hard-nosed and much-admired CEO, has such star power that people at the time focused as much on his decision to postpone his retirement to oversee the merger as on the merits of the combination itself. Some people thought Welch had such an ego that he used the acquisition as an excuse to remain in a job he could not bring himself to relinquish. In retrospect, that kind of speculation seems to have been off the mark, but personalities in business and government have played roles in the GE-Honeywell saga.
When the EC announced opposition to the merger this spring, some wondered how a group of European bureaucrats could possess the authority to thwart a transaction involving two American companies and why the firms involved would have virtually no recourse for an appeal. Another pertinent question was this: Why does the EC focus on the effects that a proposed merger would have on the competition, while U.S. antitrust officials concentrate on the effects it would have on consumers?
Actually, little is new about the EC exercising oversight over U.S. firms. European antitrust regulators have taken an active interest in other acquisitions involving U.S. companies in the past, and American officials have done the same with regard to proposed consolidations involving European businesses. Nonetheless, there was talk that Monti was primarily acting not on the merits of the case but at the urging of GE’s European competitors, who were less than eager to see the merger approved.
Inevitably, the case attracted the attention of politicians. President Bush and two U.S. senators expressed concern about the EC’s opposition to the merger. In response, Monti bristled at any suggestion that he was acting inappropriately.
"Based on what I know, I think the EC’s decision was substantively incorrect," Swaine observes. "But I am dubious of suggestions that there was something particularly untoward about the process: that the EC was listening to GE’s competitors too much, that there was anti-Americanism, and that the EC was developing a new antitrust theory [for application in this case]. I think all of those claims are incorrect. This is a theory the EC has used before and I don’t think this is a result of bias against American companies. European companies themselves have said they can’t believe how rigid Monti is" in applying antitrust rules consistently in all cases.
However, Rajendra K. Srivastava, a marketing professor at Emory University’s Goizueta Business School and the University of Texas at Austin, says Monti did not help his case by offering different reasons at different times for his opposition to the merger. The multiple explanations, Srivastava says, gave the appearance that EC officials were making up antitrust rules as they went along.
"At first, the EC said it didn’t like the fact that GE and Honeywell wanted to ‘bundle’ GE’s aircraft engine business and Honeywell’s avionics business" because bundling would harm GE’s competitors, says Srivastava, who conducts research on shareholder value. "GE fought back and successfully criticized the theory of bundling as being anti-competitive. Then, the EC changed its mind. It said it was concerned that GE’s aircraft-leasing business [GE Capital Aviation Services, or GECAS] would make things difficult for GE’s competitors."
At that point, European authorities insisted that GE sell $4 billion of its avionics business to competitors. GE, which initially had wanted to sell only $1 billion of the avionics unit, agreed to meet the EC halfway and said its would sell $2.2 billion. But the EC then changed its mind once again, saying it wanted GE to sell $7 billion worth of avionics so that its competitors would be in a stronger position to compete with GE. In addition, Monti announced that he wanted GE to sell 20% of GECAS in the open market. "From GE’s point of view, what the EC has wanted has been a moving target," says Srivastava.
When Welch balked at the EC’s demands, it appeared the deal was scuttled. Things were so bleak that on June 19 Jeffrey Immelt, who is to succeed Welch as GE’s CEO, told a French publication that the chances of a deal going through were ‘nil.’
Days later, however, GE unveiled an 11th-hour counter proposal, offering to sell 19.9% of GECAS in a private placement to non-competitors. But Monti said the proposal was not enough to address his concerns. On June 28, EC officials voted to endorse Monti’s recommendation that the merger be rejected. Again, the deal looked dead.
But Honeywell saw one last chance to secure approval for the deal. On June 29 its CEO, Michael Bonsignore, wrote a letter to Welch offering to accept $1.8 billion less than previously agreed so that GE would be compensated for money it would lose by selling 19.9 % of GECAS. But that hope was summarily quashed. In a letter to Bonsignore, Welch responded that regulators would not be swayed by the offer, that the EC’s demands cut "the heart out of the strategic rationale for our deal," and that Honeywell’s offer "makes no sense for our shareowners, for the same strategic reasons."
On July 3, EC officials finally nailed the coffin lid shut on the acquisition by officially rejecting the merger and vetoing GE’s bid for Honeywell. Some media reports suggest that GE decided not to unilaterally withdraw its proposal for the acquisition since this could expose GE to a lawsuit from Honeywell. In a statement, Monti said: "The merger between GE and Honeywell, as it was notified, would have severely reduced competition in the aerospace industry and resulted ultimately in higher prices for customers, particularly airlines."
In calling attention to the differences in the criteria used by U.S. and European antitrust authorities to assess mergers and acquisitions, the GE-Honeywell case underscores the need for more serious discussion about how regulators around the world can work more closely on antitrust cases to avoid confusion and charges of protectionism, faculty members say. A variety of solutions, all with strengths and weaknesses, have been floated – such as creating rules for competition policy within the World Trade Organization or establishing a global body to oversee antitrust issues.
Engaging in discussions to achieve some kind of regulatory consistency "wouldn’t be a bad thing to try to do," says Russell Coff, a professor of organization and management at Goizueta who studies mergers and acquisitions. "Within the EU there are so many voices [for and against mergers, each time a case comes up] that regulators have a real chore to get their act together. We have multiple voices here, too, but nowhere near the type of problem evident in the EU. U.S. antitrust people recognize that just because a market is becoming more concentrated isn’t necessarily a bad thing."
Coff adds that it would be irresponsible for U.S. politicians to press Justice Department regulators to retaliate against proposed European mergers in the wake of the GE-Honeywell failure. "If it came to that it would certainly hurt everybody," Coff says. "I would not want to see a tit-for-tat type thing."
Indeed, Coff points out that the notion of defining large American multinationals as "U.S. firms" is dated. "We think of them as being U.S. firms, but they hold significant assets in other countries. If you compare those assets to the assets of other firms in those countries, the U.S. companies are big local players."
Some faculty members say the case shows that GE underestimated what it would take to sway the EC. But they say Welch’s reputation as a master chief executive will not suffer for his having wooed and lost Honeywell. "There’s no question that people will think of this failed deal when they assess Welch’s years at GE," says management professor Michael Useem, director of Wharton’s Center for Leadership and Change Management. "But the bigger picture is that his record is made up of thousands of important decisions. The Honeywell deal will remind us that Welch is a mere mortal like the rest of us, but it won’t be a major blot on his record."
Some believe that GE may be better off for not having acquired the Morristown, N.J.-based Honeywell. In the eight months since the deal was announced, it became evident that the plodding antitrust regulatory process could be overtaken by events in a fast-moving business environment. As time wore on, GE may have detected something in Honeywell that made the deal less attractive that it appeared last year.
"Has anything changed since last fall?" asks Srivastava. "We’re now looking at a down market compared to an up market last year. If I was in senior management at GE and if I had any qualms [about the value of acquiring Honeywell], I could use [the EC’s opposition to the merger] to drop out."
Coff says that even if GE did all it could to fulfill its legal obligation to push for the deal’s approval -- and there have been press reports that GE may not have pressed as hard as it ought to have -- the company may be better off without Honeywell. "It certainly would have been a large transaction and large transactions such as this one are always difficult to implement," Coff says. "Making money from large transactions like these has a pretty dismal record." Plus, Coff notes, GE spent a lot of time and money in pursuit of Honeywell. "Those are sunk costs, and that’s probably a significant loss for them."
Srivastava notes that Honeywell had good reason to fight tooth and nail for the merger. GE’s stock, he explains, had a recent price-to-earnings multiple of 40 and a price-to-cash-flow multiple of 25, while Honeywell’s shares had multiples of 25 and 14, respectively. "This means that the market would perceive Honeywell to be worth more as part of GE than as a stand-alone company," he says. "This is why Honeywell’s board and senior management tried desperately to make sure the deal didn’t fall through."
But the deal did fall through, which means "there may be a real cost to Honeywell," according to Wharton’s Swaine. The time it takes to approve or reject an acquisition proposal, he says, "is one of the big problems with the antitrust process in general, even though authorities try hard to accelerate the process. Companies invest a lot of time in the process, during which talented people often leave and strategies are put on hold. And you have to be cautious about sharing information with your potential partner."
Coff agrees. "During this time a whole host of projects have probably been on hold [at Honeywell]. In technology industries where six or eight months is crucial, having projects on hold can be a serious problem."
Srivastava says GE may be bruised from its battle with the EC but that it will sooner or later seek other acquisitions. "GE has no option but to keep growing through M&A’s. If you’re running a company that has $2 million in sales, it’s easy to go to $4 million but harder to go to $8 million. GE has sales of well over $100 billion, so how easy do you think it is to go to $200 billion? Just to meet investor expectations, GE has to identify and go after profit pools, whether they’re in aerospace or finance."
Srivastava says he cannot fault GE for not foreseeing the kind of difficulty it would encounter in seeking the EC’s blessing on the merger. But Swaine sees the case as "a cautionary tale" for all multinationals "about the need to seek specialized [legal] advice as early in the process as possible."