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EU kills GE-Honeywell

July 3, 2001 Posted: 2130 GMT

NEW YORK (CNNfn) -- The European Union Tuesday officially rejected General Electric Co.'s planned $42 billion acquisition of Honeywell International Inc., the first time a proposed merger between two U.S. companies has been blocked solely by European regulators.  

The 20-member European Commission, meeting in Strasbourg, France, fully backed Competition Commissioner Mario Monti's decision to block the takeover of Honeywell, which has been widely expected.

Honeywell (HON: up $0.99 to $35.10, Research, Estimates) stock rose on the news while shares of GE (GE: down $0.69 to $49.51, Research, Estimates) closed lower.

The move leaves Honeywell's future uncertain. The diversified manufacturer with $25 billion in annual revenue was in the process of selling some of its units when it announced a deal last fall to be purchased by United Technologies Corp. (UTX: up $1.87 to $72.95, Research, Estimates), only to have that bid trumped by the GE proposal.

The collapse of the deal left analysts who follow Honeywell expecting the board to replace Michael Bonsignore as CEO and chairman with Lawrence Bossidy, 66, the former CEO and chairman of AlliedSignal Corp., which acquired Honeywell in 1999 and adopted the company's name.

Honeywell had no comments on those rumors, which were reported in Tuesday's Wall Street Journal, although a spokesman said the company is disappointed with the EU's action.

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The EU's action, while expected, sparked a final round of criticism from the regulators and GE.

"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," Monti said in a statement.

The commission's statement said that there were ways the deal could have been structured to win approval. It quoted Monti as saying he regretted the companies did not take the necessary steps to answer the regulators' concerns.

GE, the world's biggest conglomerate, last week offered to sell assets with about $2.2 billion in annual revenue in a bid to save the deal and win approval from the European Union regulators. In a statement, GE expressed disappointment with and criticism of the EU's action.

"We strongly disagree with the commission's conclusions about the competitive effects of GE's acquisition of Honeywell," the GE statement said. "The facts just don't support these assertions. We believe this acquisition would have clearly benefited consumers in terms of quality, service and prices."

The GE statement made no mention of the plans of CEO Jack Welch, who had pushed back his retirement date to the end of the year so he could oversee the completion of the now scrapped acquisition.

Assistant U.S. Attorney General Charles A. James said the EU's decision "reflects a significant point of diversion" with U.S. antitrust regulators.

"The EU ... apparently concluded that a more diversified, and thus more competitive, GE could somehow disadvantage other market participants," James said in a statement. "Consequently, we appear to have reached different results from similar assessments of competitive conditions in the affected markets."

Honeywell made an 11th-hour attempt to save the deal Friday, as it offered to accept a lower price if GE would make the further divestitures required by the EU. But GE rejected the offer, saying it did not make sense for shareholders.

GE's stock is up since the collapse of the deal became apparent last month, suggesting that the stock should not be hurt by the end of the deal either short-term or long-term, according to Kent Newcomb, analyst with AG Edwards.

"I think GE is going to go back to its core businesses and refocus on them," Newcomb told CNNfn's Market Call. "The company has been growing very strongly. We expect the growth to continue despite a very soft economy. I think at the end of the day they'll wash their hands and move on."

U.S. regulators already had approved the purchase, with minor conditions. But the EU regulators had concerns that GE's huge market power in aerospace products and engines would prove anti-competitive.


"It's a fundamental difference," said Michael Regan, analyst for Credit Suisse First Boston, on CNNfn's Before Hours program Tuesday immediately after the vote. "The United States cares more about the impact of a merger on customers. The European Union seems to be focusing more on the concerns of competitors. This is a very interesting precedent set by the EU today."

Questions about next move for Honeywell

Regan said that if that change is made in Honeywell's leadership, it could be a sign that the company will buck expectations and try to stay independent rather than find another suitor.

"I think the message that Honeywell's board is sending is that they believe a change in leadership is needed to get Honeywell back on the right track as an independent company going forward," Regan said. "The board is not necessarily putting Honeywell on the block or keeping it on the block. That's a very different expectation than current consensus on Wall Street."

Bonsignore's replacement was seen as a necessary step by several Honeywell analysts.

"I think if they do bring Bossidy in, that'd be a positive for the company," said Harriet Baldwin, analyst with Deutsche Banc Alex. Brown. "Bossidy is viewed as being much more focused on operating numbers, particularly margins. And Bossidy has a lot of credibility with investors for when the company begins to detail its plans."


Several analysts said they believe United Technologies is the only company that might make a bid for all of Honeywell, although one analyst who spoke on condition of anonymity said that Germany's Siemens AG (SI: up $0.12 to $62.32, Research, Estimates) would be a possibility.

There had been several rumors that conglomerate Tyco International Ltd. (TYC: up $0.38 to $54.98, Research, Estimates) also might be interested in Honeywell, but Tyco executives have denied interest at least three times, most recently on June 20, and Honeywell analysts say they believe those denials.

More likely than a purchase of the entire company is the resumption of the sale of the company in parts, several analysts said. Nicholas Heymann, analyst with Prudential Securities, estimates that a purchase by United Technologies would bring only $40 to $42 a share for Honeywell, whereas a breakup of the company would fetch about $45 to $48 a share, net of taxes.

"Relatively speaking, that [a bid by United Technologies] is not that likely," he said, and he didn't see anyone else likely to bid for the whole company. But he also doubted that Honeywell can make the changes it needs to survive as an independent company.

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"I don't believe this is a business that has the wherewithal to be restructured the way GE was likely to do," he said.

But Edward Wheeler, analyst with Buckingham Research Group, said he believes there is at least a 50-50 chance that Honeywell will continue as an independent company, even if it sells some of the units.

"It has every opportunity to succeed," he said.

Some U.S. officials, including members of Congress, have criticized Europe's actions in this case and have called for congressional hearings and possible retaliation for blocking the deal. But Regan said he thinks any retaliation by the United States would be a mistake. (314KB WAV) (314KB AIFF)

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