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Slides - GE Honeywell
Slides - GE Honeywell
study
Contents
Company Overview
Industrial Segments Overview and Outlook
1998 – 2000 General Electric and Honeywell M&A Deals
Deal Rationale
Case Study
Potential Synergies
DCF Valuation
Relative Valuation
Gallinelli as an arbitrageur
Gallinelli’s expected returns
Arbitrage spread and probabilities of deal completion
Recommendation for Gallinelli
HONEYWELL
Industry
Headquarters
GENERAL ELECTRIC
Industrial Conglomerate
Fairfield, CT
Overview Industry
Headquarters
Industrial Conglomerate
Morristown, NJ
Ticker NYSE: HON
Ticker NYSE: GE
New York Stock Exchange
New York Stock Exchange
Boston Stock Exchange
Stock Exchange Boston Stock Exchange Stock Exchange
Pacific Stock Exchange
London Stock Exchange
London Stock Exchange
Market Capitalisation
Relative Size (Year‐end 2000)
(Year 2000)
140000 Revenue 700000
120000 600000
100000 500000
Million USD$
Million USD$
80000 400000
60000
300000
40000
Revenue 200000
Net Earnings
20000
Net Earnings 100000
0
General Electric Honeywell 0
General Electric Honeywell
Aircraft Engines Aerospace
8% Appliances Solutions
5% 40%
Industrial Products
and Systems Power and
9% Transportation
GE Capital NBC Products
Services 5% 14%
50% Plastic…
Power Systems
11% Performance
Automation &
Materials
Technical Products and Services Control
6% 16%
30%
Company overview
70000 70000
Revenues ($ USD M)
Revenues ($ USD M)
60000 60000
50000 50000
40000 40000
30000 30000
20000 20000
10000 10000
0 0
Aerospace Automation & Performance Power and
Solutions Control Materials Transportation
Products
1998 1999 2000
1998 1999 2000
60.00
50.00
40.00
30.00
20.00
10.00
0.00
HON $US GE $US
1998 – 2000 M&A Landscape*
GE Acquisitions by Target Industry Sector
80 20000
HON Acquisitions by Target Industry Sector
80 Includes Allied
20000
70
Announced Value
Announced Value
70
Number of Deals
16000
Number of Deals
Signal’s deal 16000
60
(Million USD$)
(Million USD$)
60
50 12000 50 12000
40 40
30 8000 8000
30
20 4000 20
10 4000
10
0 0 0 0
Basic Materials Consumer, Industrial N.A. Technology
Cyclical
GE Divestments by Target Industry Sector HON Divestments by Target Industry Sector
80 20000 80 20000
Announced Value (Million
70 70
Announced Value
Number of Deals
60 16000 16000
(Million USD$)
60
50
Number of Deals
12000 50 12000
40 40
USD$)
30 8000 8000
30
20 4000 20
10 4000
10
0 0 0 0
Basic Materials Communications Consumer, Cyclical Consumer, Non‐
cyclical
Basic Materials Consumer, Cyclical Industrial N.A.
Deal rationale
• 19th October 2000, United Technologies Corp (UTC) and Honeywell announced they were in merger discussions.
Together, they could become a dominant supplier in the aerospace market and an effective GE competitor
‐ After an alleged offer of 0.74 UTC shares for each Honeywell share, UTC walked away from the deal once
they found out GE had entered with a superior offer
• Motivations
‐ GE would keep Honeywell out of UTC’s grasp
‐ Increasing its own market power
‐ Honeywell would add another line of turbofan power plants concentrated in the lower‐thrust class
‐ Honeywell’s core group of businesses—avionics, automated controls, performance materials, and its new
microturbine technology—would be a perfect complement to four of GE’s major businesses [Aircraft
Engines, Industrial Systems, Plastics, and Power Systems]
‐ Cost and revenue synergies of $2.5‐3 billion were projected to arise from the merger, most likely through
employee layoffs and more efficient processes
Commercial Aerospace: Industry Overview by Bank of America Merrill Lynch
Industry competition
Cost Structure of a Commercial Airliner*
Landing gear, 4%
Interior, 6%
Avionics, 11% Other, 3%
• Will the merger substantially
lessen competition?
Systems, 14% • What is the degree of industry
dominance?
• How will prices and product Aerostructures, 37%
innovation be affected?
• Will the merged entity have
increased dominance in its
industry?
Engine , 25%
*Commercial Aerospace: Industry Overview by Bank of America Merrill Lynch
Synergies
General Electric first stated (on the 17th January 2001) that it anticipated USD $2.5 billion in synergies. These
would come from a combination of:
• GE’s intangible assets (Management, Six Sigma Culture and Operating System)
• Corporate Services. It had been announced that Honeywell would close its 550‐employee headquarters
• Complementary (not identical) products in plastics, chemicals and power generation systems
• The potential fit between Honeywell’s “Home and Building” and GE’s “Appliances”
• However, largest portion would come from increased scope and scale in Aerospace:
• Consolidation of R&D efforts
• Supply chain power – higher volumes
• Reduction in SG&A
• Potential cross‐subsidisation and increase in market share
Valuation
DCF valuation
• Several valuation mistakes need to be adjusted: terminal growth rate, FCF components, WACC, etc.
Comparable transactions: Aerospace Deals
• Three deals presented appear too low when compared with the proposed GE – Honeywell merger
• Deals are at Aircraft Original Equipment Manufacturer (OEMs) level, i.e. a different level in the value chain
• Gulfstream Aerospace and McDonnel Douglas have a completely different capital structure than Honeywell
• From synergies perspective, the Boeing – McDonell Douglas deal could be comparable
• The United Technologies – Sundstrand deal looks very similar from a company perspective but the size of the deal too
small and the consideration was in the form of cash, stock and collar.
Comparable transactions: Jumbo Deals
• The deals presented are of the right order of magnitude in size but they fundamentally represent deals that occurred in
other industries
• The debt to equity, stock price/book value multiples also appear to vary significantly and the premiums also range from ‐
4.94% up to 50%, with some deals including liabilities as part of the considerations offered
Alternative Method
• More deals from both types of deals should be collected
• Weighted averages could be used to firstly estimate an appropriate valuation for Honeywell as a Tier 1 Aerospace
supplier (obtained value will fail to reflect the size of the deal) corrected by finding more jumbo deals paying
particular attention to the type of deal collected (i.e. key multiples should not differ by more than e.g. 25%)
Merger arbitrage: Example
Stand‐alone price
This is a commonly followed strategy by risk arbitrageurs, taking a long position in the shares of a target and short
position in the shares of the bidder (to mitigate market‐related movements) hedged play on the outcome of
the deal.
If the deal completes (all other things being equal), Gallinelli will capture the original spread created when she
started her long‐short positions. Gallinelli is effectively betting that the deal will complete. If the deal fails to
consummate, Gallinelli’s losses will be significant as her position is leveraged.
In case of completion In case of non‐completion
60.00 60.00
50.00 50.00
40.00 40.00
30.00 30.00
20.00 20.00
10.00 10.00
0.00 0.00
8‐Nov‐00
6‐Dec‐00
3‐Jan‐01
10‐Jan‐01
17‐Jan‐01
24‐Jan‐01
31‐Jan‐01
7‐Feb‐01
14‐Feb‐01
21‐Feb‐01
28‐Feb‐01
15‐Nov‐00
22‐Nov‐00
29‐Nov‐00
13‐Dec‐00
20‐Dec‐00
27‐Dec‐00
completion
• Reason: Honeywell shareholders approved the
Probability of deal completion proposed merger on January 10, 2001. GE
100.00% announced 16 percent revenue gains and a 19
90.00%
percent increase in EPS
80.00%
70.00% • Arising of antitrust concerns led to an increase in
60.00%
the arbitrage spread decreasing probabilities of
deal consummation
50.00%
1‐Nov‐00 1‐Dec‐00 1‐Jan‐01 1‐Feb‐01 1‐Mar‐0
• The news on March 1, 2001 will push the arbitrage
spread further up the probabilities that the deal
stand‐alone value of $30.00 stand‐alone value of $32.86
will decline significantly
stand‐alone value of $34.00
Recommendation for Gallinelli
LIQUIDIDATION OF BOTH POSITIONS
Reasons
• Understand the long‐short positions of the arb: long the target shares
and short the acquirer shares