What the Pros at Honeywell, Siemens Learned About Pruning Hedges

When key executives at Honeywell (HON) and Siemens (SI)  attempt to identify candidates for divestitures and carve outs, simply put, they're looking for businesses that no longer fit within their massive portfolios. 

Businesses that are either not accretive to earnings, or are actually dilutive to earnings, or are not driving cross-divisional synergies often become divestiture candidates, Siemens' Head of Americas M&A Kenneth Meyers said during The Deal Economy Event conference in New York on Thursday. 

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Witness Honeywell's September spinoff of its $1.3 billion-in-sales resins and chemicals business AdvanSix (ASIX) , which sources have called a cyclical commodity chemicals business with low growth. 

On the other hand, selling also can be a bi-product of buying. 

"Part of our divestiture strategy is ironically driven by acquisition," Meyers said. "We make large acquisitions and there's always things we find later that don't really fit. The more we buy, the more we sell."

To be sure, acquisitions and divestitures go hand-in-hand for large industrial conglomerates like Siemens and Honeywell.

In mid-November, Siemens announced it acquired Mentor Graphics (MENT) for $4.5 billion one week after it said it would spin off its health care business, known as Healthineers.

Meanwhile, in the past 15 years, Honeywell has made 95 acquisitions that have added $15 billion in revenue, while simultaneously divesting 65 businesses that shed about $8 billion in revenue of the conglomerate's balance sheet, Honeywell's Global Head of M&A Anne Madden said at the conference Thursday. 

And investors have rewarded them for that dual-approach strategy with a market value that has grown by almost 240% in the same timeframe. 

"I think you have to be able to do both," Madden said. "Because it's an organic animal, and you have to continue to watch what's coming in, what then needs to come out."

But identifying and constructing a proper carve out transaction, or even a full-on divestiture, is far from foolproof. 

That's why it's important to actively review your portfolio on a regular basis, EY's global divestiture advisory services leader Paul Hammes said at The Deal Economy Event. 

In a recent survey, Hammes said EY consistently found that companies that review their portfolios on a quarterly basis were much more likely to generate a sales price above expectations than those that review their portfolios annually. 

Practice does make perfect, Honeywell's Madden admitted, noting that the company has invented and copyrighted a system termed the "Demise Curve" to determine when a business is ripe for offering. 

Madden said the system allows Honeywell to proactively identify divestiture candidates well before an emergency situation that might require some type of fire sale.

Because if a company relies on its internal managers to identify targets for the block, it may sometimes run into a situation where those manager's are reluctant to pilfer their pride and joy. 

"I'm not sure relying upon our underlying managers to have a really unbiased lens as they look at [businesses] is the only way to go," Madden explained. "You have to have an external review as well."

For Siemens' Meyers, incentivizing local management to participate in the divestiture is critical, but successfully cutting loose a business is also part of the story.

"Convincing the people that are most affected that it's really in their best interest that this asset find a new home—that it's not right for your company or it's not positioned the best way possible—and that in the hands of a new owner it will either get capital for growth or it will be more strategically aligned with a bigger enterprise or it will be in a position where it will generate synergies," he said. 

Nevertheless, when it comes to portfolio management, no strategy will withstand the test of time, Honeywell's Madden said. 

"Life is fluid," she said. "You have to be constantly, vigilantly and very soberly and unemotionally looking at your portfolio at all times."

As for Honeywell's next portfolio moves, sources have said the company's refrigerants business could be next on the block, while TheStreet co-founder Jim Cramer said at Thursday's conference the company is a logical suitor for Arconic (ARNC) as it is a strong aerospace play. 

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