Honeywell remained a conglomerate long after it was cool. General Electric, Danaher, Alcoa, 3M and United Technologies have all split into smaller chunks to be nimbler and more valuable. Now, the 119-year-old company behind the invention of autopilot and unleaded petrol is carving itself up to better fit the zeitgeist.
In Honeywell’s case, a prod was needed. Activist investor Elliott Management popped up last November calling for chief Vimal Kapur to wield the axe. Now three months later Elliott has what it wanted, without even having to push for a board seat, summon an emergency shareholder meeting or enter into a poison pen battle with the company’s management.
Few companies lend themselves so easily to a split. Honeywell has three parts: aerospace systems, process automation and materials. They have different customers, different product cycles, and don’t much interact. As Elliott pointed out, each has listed peers trading at higher valuations than Honeywell. Analysts at Citigroup argue the parts are worth about $280 per share — a third more than today.
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That hidden value remains hidden. Honeywell shares fell 5.6 per cent on Wednesday as it reported earnings. But consider GE, an even older conglomerate that completed its own three-way split last year. A holder of GE shares in 2021, when the partition was announced, has now tripled their money. Yet the shares went almost nowhere until the break-up began in earnest. Similarly, Honeywell’s dissection could take almost two years.
Honeywell’s share price might get some help, if potential acquirers take Kapur’s plans as an opportunity to start talks. Aerospace could be a good fit with GE’s engine business — reviving a combination the two attempted back in 2000. GE boss Larry Culp, a dab hand at corporate turnarounds, would be a safe pair of hands to run the combination. Honeywell’s automation business could click with rival Rockwell Automation.
It’s true that de-conglomeration sometimes works better in theory than in practice, especially if the underlying businesses face tough times. Look at Dow and Dupont, which went from two to one to three — with Dupont now planning to demerge again — all with little obvious gain for shareholders. GE did well, but its split coincided with a pick-up in the market for its jet engines and turbines.
Even so, focus beats sprawl. Perhaps one day that will also dawn on industries where conglomeration is still very much in fashion. Silicon Valley companies such as Amazon, Meta and Alphabet are now the ones branching out into only loosely complementary industries, from satellites to virtual reality headsets to driverless taxis. Investors generally reward or ignore this, as Honeywell’s once did. What’s old is new.