Talks of a tie-up between Honeywell (HON) and United Technologies (UTX) are all but dead, but shareholders appear not quite ready to accept defeat.
UTX investors got a major boost last week when the he Farmington, Conn.-based manufacturer's shares clocked up more than 5% off news that rival Honeywell has been knocking with a takeover bid. Meanwhile, the broader S&P traded flat on the week.
Honeywell launched glamorous portrayals of what could have been -- most recently released in a Friday presentation on its corporate website. But UTX was quick to counter with its own SEC filing Friday -- in short, saying the deal is just not working out, and that Honeywell's projected $3.5 billion in cost savings are unrealistic.
Friday's filing "provided extensive detail behind UTX's assessment that the acquisition would likely encounter significant regulatory and customer objections that would make the transaction unfeasible," William Blair analysts said in a Monday report. "We would expect some of the recent gains in UTX's share price since the potential acquisition was disclosed early last week to likely reverse following release of UTX's detailed list of concerns surrounding the merger."
Real Money's Jim Cramer, however, has said the proposed deal may highlight that the industrial market is well poised for M&A players.
"The industrials, those big, fat, ugly ducklings that have gone unloved for ages, suddenly are looking mighty good," he said in a report last week. "The acquisition highlighted something that's been lost entirely in this bifurcated market, where Kimberly-Clark (KMB), Procter & Gamble (PG) and Clorox (CLX) trade at immense levels to their earnings while many of the industrials wallow around in purgatory because of fears over China."
Such a takeover would have resulted in purchase at $108 per share for UTX shareholders, based on Honeywell's estimates, a major premium over the stock's trading levels early last week of about $92.
Even though this particular deal may never cross the finish line -- just as GE's bid for Honeywell never managed to pass antitrust roadblocks in 2001 -- investors don't seem to mind. UTX shares are down just over 1% since midday trading Friday.
"We believe UTX's filings late last Friday underscore our belief about the likely diminishing returns from ever-larger mergers whose primary means of value creation is cost reductions," William Blair analysts said. "With rising complexity, customer and governmental regulatory concerns, and likely much longer 'hang time' to secure approval (which could extend to 18-24 months), we increasingly sense that cost-reduction-driven mergers now face diminished ability to create shareholder value."
Overall, UTX will likely post double-digit growth numbers this year, according to Wells Fargo (WFC), largely off favorable trends in aerospace and expectations that UTX will effectively pare down costs, even without the help of a major combination.
"We think UTX essentially has six options," Wells Fargo analysts said in a Monday report. "It can 1) just say no to a merger; 2) hold out for a higher price; 3) effect a different transaction such as a swap of businesses ¿ i.e., combine HON/UTX to create two companies, an aerospace supplier and a building/industrial company; 4) find another merger partner; 5) look to create value near term through a leveraged recap or split of the company; or 6) do something rash and make a sizable acquisition of companies."