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.
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.
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.
By: Ankit Ajmera and Andrea Shalal (Reuters).
Additional Reporting: Greg Roumeliotis (New York).
Writing: Nick
Zieminski.
Editing: Saumyadeb Chakrabarty, Clive McKeef and Tom Brown.
Review: Emerging Market Formulations &
Research Unit, Flagship Records.
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