For Honeywell, not breaking up will be hard to do

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Honeywell International is doing its best to rehabilitate the idea of the industrial conglomerate. Elliott Management, an activist investor, has other ideas.

Elliott has amassed a $5bn — or 3 per cent — stake in the $151bn conglomerate. It is calling on the company, which makes everything from cockpit controls to warehouse robots, to split itself up into two standalone businesses: one focused on aerospace, the other on automation.

Honeywell does not seem to have got the memo that conglomerates have become achingly unfashionable. At a time when the global trend is for industrial empires to break up and generate returns by specialising in a single area of business, boss Vimal Kapur has been bulking up.

Indeed, in just 17 months on the job, he has spent nearly $10bn on acquisitions, such as a $5bn swoop on Carrier Global’s security access business.

Kapur is sticking to the idea that Honeywell can thrive as a conglomerate by shedding slower-growing, low-margin businesses and buying higher-growth ones. Alongside the acquisitions, it has announced plans to spin off its advanced materials unit into a publicly traded company and is looking to divest its personal protective equipment business.

Even so, Honeywell’s finances suggest it’s time for something more decisive. Its $5.7bn in earnings and $37bn of revenue last year are both less than what it pulled in 2019. Honeywell shares have lagged behind the wider market this year. Before the news of Elliott’s stake, the stock had risen just 12 per cent while the S&P 500 gained 26 per cent.

Compare that with General Electric, a conglomerate that did get the message that smaller is better. GE shareholders have in effect enjoyed a 160 per cent return since turnaround chief Larry Culp announced a three-way break-up in November 2021, Lex calculates. That beats the S&P 500 index’s 27 per cent gain and Honeywell’s 2 per cent rise over the same period.

Elliott makes a good case that a divided Honeywell would be more valuable. Making aeroplane engines has little in common with making electronic door locks. Aerospace operates on decade-long timelines, while the automation business requires a shorter-term outlook.

The activists also reckon a separation could push up the share price by 51 to 75 per cent in the next two years. Sum-of-the-parts analysis from Jefferies and Deutsche Bank suggest more modest upsides. But if M&A roars back under Donald Trump, a break-up could lead to future deals, with Honeywell’s pieces as targets. Honeywell Aviation could be a good fit with GE Aviation, for example. Pressure to shrink to greatness will be hard to resist.

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