Just because U.S. and Canadian regulators gave
the nod to acquire
for $45 billion, GE should not have been surprised by the European Union's hesitation to allow it to acquire the company, says Stephen O'Neil, an analyst who follows GE at regional brokerage firm
of Louisville, Kentucky. That's because European regulators tend to focus more on the corporate implications of a merger or acquisition, whereas U.S. regulators are more concerned about consumers.
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But O'Neil says that the likely scuttling of the deal may not turn out to be such a bad thing for either company, particularly GE, which would have had to divest itself of some of the most attractive parts of Honeywell to get the deal approved, and which may be better off making smaller acquisitions rather than trying to integrate the massive Honeywell.
TSC: The consensus seems to be that the deal is dead, but the EU has until July 12 to approve the proposed acquisition. Do you think it's still possible that GE or the EU might make further concessions and that the deal might still go through?
I think it is possible. The remarks made by General Electric don't provide a lot of optimism, but they made their final offer and, I guess, the EU will analyze it.
EU competition commissioner Mario Monti will make a recommendation to the commission, and they will decide.
There could be some middle ground that's found, that both sides could agree on, however unlikely that may seem at this point. The door is still open. GE has not withdrawn its merger proposal and Honeywell
on Monday also continued to back the merger, so we'll wait until a week or so from now and see how it comes out.
TSC: Do you think that what the EU was asking of GE -- that it divest significant portions of Honeywell's aerospace business and spin off its aircraft financing and leasing division altogether -- was unreasonable?
Unreasonable is a relative term, so rather than try and judge what they think is reasonable or not, let me say that one of the main attractive features for GE to acquire Honeywell was that it would broaden its ability to offer aircraft engine services and broaden its product line in the aerospace business.
GE did offer to divest some businesses, including some of the proximity warnings and ground detectors and other businesses that they really did want and felt were attractive but were willing to lose in order to meet the EU at least part of the way. These businesses they offered to divest really would have been synergistic with the aircraft engines.
TSC: This is the first U.S.-approved merger between two U.S. firms to be blocked by the EU. Some critics believe that the EU is trying to protect its own companies, but others say the U.S. is too lax on monopolistic issues. Which do you think is the case?
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signed off on the deal. They did not find the terms of the acquisition unreasonable. I think the Europeans may look at it a little differently. They look at more of the effect of mergers and acquisitions on industries, rather than the short-term effect on consumers, as we do in the U.S.
Both regions have slightly different philosophies. The U.S. may be a little more willing to allow consolidation within industries.
It's possible the Europeans are trying to protect some of the European aerospace manufacturers. But
said it didn't have a problem with the deal. So I am not sure where this is coming from.
Each side has a philosophy, certain leanings, but I don't think either side went to an extreme.
TSC: If the deal doesn't go through, where does GE go from here?
I think GE continues to move forward as they have. GE has made many, many small mergers that are not nearly as visible as this one, but which have been nice additions to their business.
Their medical device business, for example, has made a number of acquisitions. The locomotive business made some acquisitions, and the aerospace business made some acquisitions in the service area. So, there certainly are incremental acquisitions that they could continue to make which would be easier to integrate into the GE corporate culture than a large, sprawling enterprise like Honeywell.
So, it's kind of like a two-edged sword. It certainly would have been nice to have gotten the critical mass of Honeywell and some of the very large businesses pulled within GE. On the other hand, the integration of small businesses is much easier. There are good and bad points to both.
TSC: And what about Honeywell? The company has spent the last three quarters restructuring in anticipation of this acquisition. Where does that company go from here?
I do think they have some nice businesses, and they could go forward as a separate company. On the other hand, they might be considered an acquisition target by some other company. There have been rumors already.
TSC: What is GE trying to accomplish through this acquisition and how important could it be to its business?
Honeywell would have been a very attractive fit with GE aircraft engines, and there were some nice additions in power systems and chemicals. Of course, the crown jewel was the aerospace business.
But if Honeywell had been brought up to the GE standards of productivity and margin improvement, they could have added to earnings and a very large chunk of revenue to the GE revenue base, as well as added revenue growth for a number of years.