Honeywell's deal ambitions grow to industrial strength: editorial

;NEW YORK] It looks like Honeywell CEO Dave Cote wasn't kidding when he said the company was open to making a large acquisition.

The maker of everything from airplane parts to thermostats has reportedly approached United Technologies about a potential merger. Combined, the two companies have a market value of about US$160 billion and bring in more than four times the revenue of the average S&P 500 company. It would be the biggest industrial mega-merger in history, by far.

Representatives for the two companies subsequently declined to comment on the news, which was first reported by CNBC. Where a deal will go from here is unclear (United Technologies is said to have rebuffed Honeywell because of antitrust concerns), but the merger talks are telling.

First, they show how important acquisitions have become to an industrial sector that's struggling with slowing global growth, fluctuating currencies and a slump in commodities prices.

Second, it's a sign of how weakened United Technologies has become: it lost almost US$40 billion of market value in the 12 months ended on Friday. (The stock unsurprisingly rallied on Monday.)

Until recently, Honeywell under Mr Cote had focused on making small purchases, usually of private companies, and integrating them into the larger whole.

Just three years ago, Mr Cote - who took the reins in 2002 - said that when contemplating deals of more than US$1 billion, "I start to get queasy."

His strategy has paid off in high operating margins and returns that are more than twice those of its peer group over the past five years. But times are changing and the CEO is changing with them.

Faced with the biggest slump in revenue since the financial crisis, Mr Cote has overcome his queasiness and his dealmaking has gotten increasingly aggressive.

He announced his biggest takeover yet in last year's purchase of gas, electric and water meter company Elster for about US$5 billion. Now it appears that given the opportunity, he's willing to go even bigger.

United Technologies, on the other hand, has gotten increasingly more conservative with its outlook for M&A. CEO Greg Hayes - who took over in November 2014 - was at one point talking about considering deals of US$20 billion-plus to help spur sales growth. Now he says the range is more like US$1 billion to US$2 billion for each of the next three years as the company focuses within.

Shares of United Technologies have slid as the company repeatedly had to cut its earnings forecasts. A sale of its Sikorsky helicopter business to Lockheed Martin and promises to cut costs have failed to satiate investors as peers including General Electric and Danaher pursue big breakups and takeovers.

United Technologies' slump has put it on the receiving end of Honeywell's advances, whereas just last year, it was the other way around. Then, Mr Hayes was the one who approached Mr Cote about a merger of equals that would have left United Technologies' management in charge, according to CNBC.

Talks fell apart because of United Technologies' slumping stock and disagreement over who would run the combined company.

Any deal would still be close to a merger of equals, but it's clear that Honeywell is coming from a position of strength here and has a good case for having its management team pilot a merged company.

Any combination would likely draw significant regulatory scrutiny given the companies' overlap, particularly in the aerospace industry.

GE had to scrap a bid for Honeywell in 2001 (after beating out United Technologies, it's worth noting) because of antitrust objections.

Mr Cote may have his work cut out for him to explain why this deal wouldn't raise issues, but he's still smart to consider it.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

BLOOMBERG