GE-Honeywell deal kaput?
European regulators stall $41B tie, but some still think Welch will win
NEW YORK (CNNfn) - General Electric Co.'s $41 billion takeover of Honeywell International Inc. may have hit some European roadblocks but the deal is not dead, insiders said.|
Fairfield, Conn.-based GE submitted its final proposal Thursday in time to meet the deadline set by the European Commission (EC). GE offered to sell $2.2 billion worth of Honeywell's aerospace business, but the offer apparently fell short of what the European regulators wanted. GE Chairman Jack Welch expressed his surprise with the negotiations Thursday, saying that European regulators' demands exceeded what he had imagined. The very public statement spurred many to call the $41 billion takeover over.
News of the stall caused Honeywell's (HON: up $1.07 to $38.17, Research, Estimates) shares to plummet 12 percent Thursday, but the company staged a mild recovery Friday, gaining nearly 3 percent in afternoon trading while GE (GE: up $0.04 to $48.90, Research, Estimates) shares rose marginally.
Even President Bush weighed in Friday on the apparent block posed by the Europeans.
"We brought up the proposed merger at the appropriate levels during this trip and before the trip," Bush said Friday during a press conference in Warsaw, Poland. "Our government looked at the merger and approved it. The Canadian government looked at the merger and approved it. And I am concerned that the Europeans have rejected it. That's all I've got to say on it."
General Electric's negotiating team left Brussels Thursday, a spokesman said, who declined to comment further.
The European regulators had expressed concern that GE could use its aircraft leasing arm, GE Capital Aviation Services, to compete unfairly against other companies.
The Commission wanted the U.S.-based industrial conglomerate to either spin-off GECAS or sell shares in the unit. Instead, GE proposed to set up a separate audit and management structure for GECAS and sell $2.2 billion worth of Honeywell's aerospace products.
The Europeans backed down from GE's offer because of GE's strategic behavior, a source close to GE told CNN.
"GE is too big, has too much money and can act without worrying about profits on particular products or even the quality of those products," the source said.
A personality clash also emerged between the Euro regulators and U.S.-based GE/Honeywell team. A young staff—all under 40 years old—comprised the EU side that wanted to take on the "Great Jack Welch" and saw the negotiations as a way to introduce their new antitrust ideas, the source said.
The source also characterized EC Commissioner Mario Monti as an "absent landlord" who needed to make a decision at a late stage.
"This is going to make U.S. companies wary of Europe," the source said.
The EC will continue to review GE's proposal until July 12, when the regulators' competitive review process of the proposed acquisition ends.
GE's final offer still can be changed after the July 12 deadline, EC spokesman Michael Tscherny said. GE still can withdraw the offer, change it, and resubmit at a later stage, which would trigger the whole EU assessment process again.
Another option has the company amending its offer by providing "clear-cut" information that is not open to interpretation.
The Commission has yet to receive any amendments from GE. "We are running out of time here," Tscherny added.
Many did not think GE could come back from the roadblocks. "It looks like it's over to me," analyst Kent Newcomb of A.G. Edwards said. "Maybe I'm missing something, but they look pretty far apart."
Theoretically the deal still could happen, but it looks very unlikely, analyst Jeff Sprague of Salomon Smith Barney said. "GE did not need to do this deal and we are pleased they were not willing to do it at any cost," he said.
But a small minority still thinks that Welch can pull a rabbit out of a hat.
"Just look at what he's done, what he has built GE into," an insider told CNNfn.com. "Don't count this guy out."
This is not the first time European regulators have nearly put the brakes on a major U.S.-based merger. In 1997, the $14 billion transaction between Boeing Co. and McDonnell Douglas Corp. went down to the 11th hour before it was approved.
If GE does manage to revive the merger, it will lose a couple pennies of accretion in the first year, which the company thinks it can make up in the second year, Salomon's Sprague said.
Collapse of the GE-Honeywell transaction may open the door for United Technologies Corp. which broke off negotiations last year in the face of GE's richer offer.
Analysts said that a possible United Tech (UTX: down $1.20 to $75.90, Research, Estimates) bid would not come soon and would be lower than GE's offer, valued at $51.55 a share.
"United Tech would look at GE's offer as a ceiling and they would be below that," A.G. Edward's Newcomb said.
"UTX would have some of the same challenges as GE," Salomon's Sprague added.
Pembroke, Bermuda-based Tyco International also may be waiting in the wings. Tyco (TYC: down $0.16 to $55.35, Research, Estimates) was rumored to be interested in acquiring Honeywell during the United Tech talks last year.
Honeywell may have to go solo since there are few companies capable of buying the firm, one analyst said.
"We are prepared for any outcome," a Honeywell spokesman said.
A spokesman for United Tech, a maker of jet engines, elevators and aerospace products, declined to comment. Tyco, a diversified manufacturer, could not be reached for comment.