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News > Deals
GE sets Honeywell deal
October 23, 2000: 4:28 p.m. ET

Welch leads $45 billion purchase; will remain GE chairman     through 2001
By Staff Writers Luisa Beltran and Martha Slud
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NEW YORK (CNNfn) - Jack Welch, in the twilight of his career as General Electric Co.'s chairman, pulled off the biggest acquisition in the company's 108-year history Monday, luring avionics maker Honeywell International away from rival suitor United Technologies Corp. in a surprise $45 billion deal.

To seal the acquisition, Welch agreed to delay his retirement until the end of next year to see the deal through. Welch, one of the most respected corporate executives in the United States, turns 65 next month and was expected to step down in April 2001.

"This was a critical item for our board," Honeywell Chairman and CEO Michael Bonsignore said at a news conference Monday. "Without a commitment from Jack to stay aboard during this critical period of integration, I think there would have been a high level of nervousness in terms of our board and their ultimate decision." (282WAV))AIF282)

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  "I've spent more time with Jack in the last 72 hours than I've spent with my wife."  
     
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  Michael Bonsignore
Honeywell Chairman and CEO
 
The boards of both companies approved the deal Sunday after whirlwind weekend negotiations. "I've spent more time with Jack in the last 72 hours than I've spent with my wife," Bonsignore joked.

The deal brings Honeywell into GE's portfolio of businesses, which includes making aircraft engines and a television network. The purchase is expected to produce significant cost savings for GE, analysts said, and the combined firm will now have about 465,000 people.

Some analysts speculated that the deal could result in 30,000 to 50,000 job cuts, or 10 percent of GE's work force, but others said the numbers seemed inflated.

"There is no way to know right now," one analyst said, who declined to speak for the record. "There are always more headcuts than anticipated at a merger announcement."

GE declined to comment on the issue and maintained that it was too early to predict how many jobs would be lost from the merger.

Welch declined to specify how many positions would be lost but added, "No one is guaranteed a job in this."

  graphic TERMS OF THE DEAL  
    GE swooped down at the last minute and grabbed Honeywell from the jaws of United Technologies. Here are some of the highlights of the deal.        
  • Deal values HON at $55.12/shr -- a 19.8% premium
  • Welch to remain at GE until end 2001
  • Deal expected to close in early 2001
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      Only three days earlier, Honeywell appeared set to be acquired by industrial conglomerate United Technologies Corp. (UTX: Research, Estimates) for about $40 billion, but United broke off the negotiations Friday following a last-minute bid for Honeywell from an unnamed company that turned out to be General Electric  (GE: Research, Estimates). All three companies are components of the Dow Jones industrial average.

    At the news conference, Welch recounted how he was standing on the floor of the New York Stock Exchange late Thursday afternoon when he saw Honeywell's stock price jump about $10 on the ticker. When he got wind of the United Technologies bid, he said, GE mobilized immediately to make an offer.

    "They were making a deal for a property that clearly was a property that we wanted to own, so we had to act, and act as quickly as we could, and make the offer more attractive," Welch said in an interview with CNNfn.

    Thinking 'outside the box'

    He said the deal was not meant as a swan song to cap his career, but instead represented an important opportunity for GE to gain control of a company it coveted.

    "We couldn't sit there while the world was going on, having a perfect GE succession plan. That's inward thinking," he said. "It would have been nice if this whole thing could have happened a year ago. It might have been nice if this happened 18 months from now, but it was there."

    He called the acquisition "the most exciting deal for GE since RCA." Fairfield, Conn.-based GE acquired RCA and its NBC broadcasting subsidiary in 1986.

    Welch still is expected to select a successor later this year after nearly 20 years at the helm of one of America's best-known companies. Welch took over the company in April 1981 when GE had a market capitalization of $13.9 billion. Today, the company is worth roughly $489.9 billion.

    Top contenders for the job include Jeffrey Immelt, CEO of GE Medical Systems; Robert Nardelli, chief of GE Power Systems and W. James McNerney Jr., head of GE Aircraft Engines, a source close to the situation said.

    "It would certainly be someone from GE," the source said, who discounted Honeywell's Bonsignore chances of ascending to the position.

    Welch reiterated at the Monday conference that he will name a successor by the end of the year.

    GE will swap 1.055 of its shares for each of Honeywell's 801.5 million shares outstanding. That arrangement values Honeywell (HON: Research, Estimates) at $55.12 per share, a 19.8 percent premium over its closing price Friday of $46 and a 10 percent premium over United Technologies' bid, which was worth about $50 per share. graphic

    The deal, expected to close in early 2001, also calls for GE to assume an unspecified amount of Honeywell debt. Analysts estimate that GE will take on about $5 billion in Honeywell debt but discounted its effect since GE has about 4 percent debt to total capital ratio.

    The GE-Honeywell deal could produce as much as $12 billion-to-$15 billion in savings over the next 30 months, some analysts said. However, analyst Martin Sankey, of Goldman Sachs & Co., said the cost savings are too high since Honeywell had only $25 billion in revenue.

    Welch said the deal could close as soon as February but analysts questioned such a quick completion.

    "February is kind of aggressive," one analyst said, who declined to speak for the record. "The [White House] administration will change and they will look at this deal as coming together pretty quickly."

    The purchase will boost GE's earnings per share by double digits in the first full fiscal year, excluding any one-time charges. Honeywell will close its corporate headquarters in Morristown, N.J., which is expected to cause about 500 job cuts there.

    Analyst Jeanne Terrile, of Merrill Lynch, expects the deal to add 10 cents to GE's earnings in its first full fiscal year.

    Honeywell's Bonsignore discounted talk that cultural issues would clog up the deal. However, he admitted that headquarters would probably encounter the most problems with the merger.

    Regulatory issues

    Merrill's Terrille cited Honeywell's avionics business, where it is a leading producer of avionics, or aircraft electronics as its greatest asset. Honeywell also makes turbochargers, specialty chemicals and automated control systems. The deal comes only 10 months after Honeywell merged with Allied Signal. graphic

    "The chemical and auto parts business is not so great and we do not believe that GE wants these businesses longer term," Terrill wrote in a research note. "We believe that Honeywell's automation business may make GE world class in that category."

    GE, a leading manufacturer of aircraft engines, is a diversified company that produces power plant parts, aircraft engines as well as the NBC television network.

    GE will now us the "GE-Honeywell" brand for some products.

    Overlap in some areas is expected to raise antitrust concerns among U.S. and European regulators, who could require the combined firms to divest some businesses.

    The deal is now expected to head to the Department of Justice for regulatory approval, analysts said.

    But Welch said the company's product lines all are complementary.

    "That's not a speech for the antitrust people. That's fact," he said. "You can pore through these (product) lines one by one, and take a hard look and see that. That's a remarkable, a remarkable, situation in an acquisition."

    Goldman's Sankey said there is some overlap in the regional jet arena. "It is a relatively fragmented marketplace," he said. "They seem convinced that the two lines are sufficiently differentiated that they don't constitute antitrust problems."

    In mid-day trading Monday, General Electric  (GE: Research, Estimates) shares fell $2.94 to $49.31 while Honeywell  (HON: Research, Estimates) gained $3.25 to $49.25, following a more than $10 surge Friday. United Technologies shares fell $1.69 to $63.83. graphic

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