Elliott Management wants to split Honeywell in two
Vimal Kapur, the boss of Honeywell, should have seen it coming. Industrial conglomerates like his have long been out of fashion. Between the beginning of June last year, when Mr Kapur took over at Honeywell, and November 11th the firm’s shares had risen by just 16%, compared with 46% for industrial companies in America’s S&P 500 index. On November 12th Elliott Management, a feared activist investor run by Paul Singer, announced it had taken a $5bn stake in the company, probably its largest ever such position, and called for Honeywell to break itself up. Investors seemed pleased with the idea, sending Honeywell’s shares up by 4% on the day of the announcement.
To his credit, Mr Kapur has been busily making changes at Honeywell, which manufactures everything from masks to machinery. He has reoriented the group around three big themes—automation, the future of aviation and the energy transition—and made $10bn-worth of acquisitions to bolster its businesses in those areas, with purchases including an industrial-software company, a radio-equipment manufacturer and a maker of liquefied-natural-gas equipment. At the same time, he has made plans to divest peripheral businesses such as a specialty-chemicals unit, raised the company’s dividend and bought back shares from investors.
All this, Mr Kapur has claimed, is “accelerating value creation”. Yet it has not been enough to reverse the lacklustre financial performance in recent years of America’s last big industrial conglomerate. Although Honeywell makes as healthy a profit margin from its automation and aerospace businesses as its peers, the company’s growth continues to be tepid. Excluding acquisitions, its revenue rose by 3% in the quarter to September, compared with the previous year, falling short of Mr Kapur’s ambition of 4-7%. That continues a disappointing pattern. In a letter to Honeywell’s shareholders, Elliott pointed out that the company’s earnings per share grew at 3% between 2019 and 2024, among the slowest of its peer group. Its price-to-earnings ratio has also lagged.
Elliott acknowledged Mr Kapur’s efforts at simplification, but described these as “incremental”, arguing that they failed to resolve the underlying problem of Honeywell’s conglomerate structure, which makes the company too complex to manage. Instead, Elliott wants Honeywell to break itself into two separate companies focused on aerospace and automation.
Its case is strengthened by the success of similar breakups in the past few years. In January last year the market capitalisation of General Electric, a once mighty American conglomerate that has since split itself into three standalone businesses, was about $90bn. Today those businesses have a combined value of around $325bn. The breakups of Ingersoll Rand and United Technologies, both completed in 2020, delivered far more value for shareholders than analysts first expected, according to Melius, a research firm. In Elliott’s view, Honeywell’s breakup could result in share-price gains of as much as 75%, lifting its market value to more than $240bn.
The argument is compelling and the size of Elliott’s stake shows conviction. The question now is whether Mr Kapur will listen. Elliott is not the first activist investor to call on Honeywell to break itself up. In 2017 Dan Loeb of Third Point, another Wall Street titan, tried to get the company to separate out its aerospace division. Honeywell’s boss at the time, Darius Adamczyk, rejected the recommendation, though he did sell off various smaller businesses, including Resideo, a maker of smart-home products. Mr Kapur has yet to say whether he will heed the call for a breakup this time. With investors growing increasingly impatient, though, he may have little choice.
This article appeared in the Business section of the print edition under the headline “A sticky situation” (Nov 14th 2024)
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