AlliedSignal-Honeywell Merger Clears Final Hurdle

After winning approval from the European Commission, the combined company is expected to begin trading on the NYSE Thursday.
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(HON) - Get Report

were on track to complete their $24 billion merger Wednesday after the

European Commission

approved the deal.

Regulatory approval by the commission followed the

U.S. Department of Justice's

approval early last month and imposed many of the same conditions, namely the required divestiture of significant portions of the two companies' avionics businesses.

The companies also increased their estimate of the cost savings from the merger by $250 million.

The European Commission's authorization was the last hurdle in the deal's way. The two technology and manufacturing companies now expect to close the merger after trading ends on the

New York Stock Exchange

Wednesday. The combined company, to be called Honeywell, is expected to start trading Thursday on the Big Board under the ticker symbol



"The authorization is subject to compliance with a number of commitments," the European Commission said in a statement. "The commitments were necessary because the commission's in-depth investigation raised serious doubts about the creation or strengthening of a dominant position on particular markets for avionics products."

The conditions are similar to those imposed by the Justice Department, which require the combined company to divest operations that generate $250 million in annual revenues. The new entity must sell AlliedSignal's search and surveillance weather radar business, its space and navigation business and parts of its inertial systems business. It must also get rid of Honeywell's traffic alert and collision avoidance systems business.

Wall Street reacted favorably to the news. By late Wednesday morning, Honeywell shares were up 2 1/2, or 2%, at 114 7/16, while AlliedSignal shares were up 1 1/16, or 2%, at 61 1/16. (Honeywell closed up 2 1/4, or 2%, to 114 3/16 while AlliedSignal finished up 5/8, or 1%, to 60 5/8.)

The duration of the European Commission's review caused "a little nervousness in the market," said Linda Varoli, an analyst at

Merger Insight

who does not rate either company and whose firm has done no underwriting for either AlliedSignal or Honeywell. In mid-August, the initial one-month review was extended for two weeks, which usually means that a decision is close at hand. But at the end of August, after the two weeks had passed, the commission decided to further extend the review by four months.

Shares of Minneapolis-based Honeywell fell over 3% during that period, while shares of AlliedSignal, based in Morristown, N.J., dropped almost 5%. But Varoli surmised that both companies were working concurrently with the Justice Department and preferred to agree to concessions with the Justice Department first, as the companies are both based in the U.S. and most of the overlaps affected the U.S. market.

"We have spent the past five months developing comprehensive integration plans and will now swiftly implement them across the new company," said Lawrence Bossidy, chairman of the new Honeywell, in a statement. "We expect to complete the bulk of our integration activities by mid-year 2000."

AlliedSignal and Honeywell raised the cost-savings estimate from the merger to $750 million from $500 million in 2002, with cost savings the first year expected to be $250 million. The integration teams found additional cost savings opportunities by combining the global infrastructures of both companies and leveraging the combined company's purchasing strength, among other things.

The merger should also immediately add to earnings, according to the companies, with earnings per share expected to grow by 20% in 2000 and at a compounded annual rate of at least 18% over the next three years. The annual operating margin is expected to grow at least 1 percentage point per year from 14% in 1999 and free cash flow before dividends is expected to be $3 billion in 2002.

"This being a merger there's no good will that has to be amortized, no tax consequences and no increased indebtedness," said Paul Nisbet, an analyst at

JSA Research

. "The combined entity should be stronger than the two individually. With good management, this company should grow." Nisbet rates AlliedSignal a hold and his firm does not participate in underwriting. He does not rate Honeywell.

The new Honeywell also estimates that it will have to take a charge of approximately $850 million to $950 million because of the merger and restructuring.

Bossidy will step down as chairman next April. At that point, Michael Bonsignore, chief executive of the new Honeywell, will also take over as chairman. The Honeywell headquarters are in the process of being closed and Bonsignore is relocating to AlliedSignal's office in New Jersey.

Each share of Honeywell stock is being exchanged for 1.875 shares of the new Honeywell, formerly named AlliedSignal. Based on 128 million former Honeywell shares outstanding and the closing price of AlliedSignal's shares of $60 on Nov. 30, the transaction is valued at more than $14 billion. When all of the former Honeywell shares are exchanged, the new company will have approximately 793 million shares outstanding with a market capitalization in excess of $47 billion.