October 19, 2000 Honeywell’s stock was up $10 due to recent merger discussions between Honeywell and United Technologies Corporation (UTC). For every share of honeywell, UTC would pay 0. 74 of its own stock. In other words, the merge would lead to a dominant supplier company in the aerospace market, and a strong competitor for GE. This led John F. “Jack” Welch Jr. , GE’s chair and CEO, to call Michael Bonsignore, chair and CEO of Honeywell, to present a bid maintaining a 1:1 share for share exchange ratio. GE won the bid against UTC and agreed to a price of 1.
055 GE shares for every share of Honeywell’s, plus assumed debt. The regulatory filings were submitted to the U. S. Department of Justice (DOJ) and notified the European Commission of the merger because of the large amount of European sales between the two companies. On July 3, 2001, the merger was denied. Bancroft Capital Management owns a large stake in Honeywell. Our objective is to find out if Jessica Gallinelli, managing director of Bancroft, should hold or sell the fund’s 10 million Honeywell shares and alter its short position of 10 million shares in GE.
Questions: What are the reasons for the European Union and European Commission rejecting the merger? The EU measures the company’s degree of industry dominance and takes into consideration whether or not a merger will cause increased dominance in their associated industries. European authorities consider the perspective of competitors which could have played a major role in the Honeywell- GE merger rejection. European antitrust officials believe they saw the potential for vertical (bundling certain products) and horizontal (overlapping product lines) integration.
Mario Monti, antitrust chief of the EC, argued that Honeywell and GE’s products were complimentary which would allow different suppliers would be mixed and matched because of the trend towards open systems. The EC showed concern for the possibility of increased market power and the potential leverage that would be acquired by GE over customers and competitors. Even though the merger would reduce prices for customers in the long run, rivals could face eroding margins, leading to GE being a monopoly and afterwards possibly increasing prices.
Also, by GE owning GE Capital Aviation Services (GECAS), the merger could allow a greater mixture of aviation products and give GECAS too much power over its customers. What are the counter arguments for the merger rejection? The facts the make up the corporations’ roles in their respective markets can lead the United States and the European Union to come up with different interpretations in their competition analyses. We know that the European Union measures the company’s degree of industry dominance and takes into consideration whether or not a merger will cause increased dominance in their associated industries.
However, the Department of Justice assesses whether the merger would substantially lessen competition, and how prices and product innovation would subsequently be affected. The Department of Justice and European Commission view market dominance differently. Even though the common definition for the classification as “market dominant” is similar between both the DOJ and EU, the differing interpretations and applications highlight the separation between regulation in theory and in practice.
With this knowledge we can see how the European Commission and Department of Justice can come up with differing viewpoints. The European Commission acknowledged that the increased competition would lower prices for customers in the short run. However, their viewpoint was much more long term as it expressed fear that GE’s rivals would face eroding margins and not be able to keep up in the long run, which would thereby decrease competition, reduce product development in the industry, and therefore enable GE to increase prices.
The Department of Justice however, has a more short term view on the merger. Their viewpoint is that it sees the effects of package discounting and reduced pricing to be efficient and competitive. How would General Electric and Honeywell’s stock prices be affected by the investigation? Anytime a company is investigated by a regulatory commision it is generally a bad thing. The EC’s investigation of the stock prices would likely have an adverse affect on the stock price and stockholder confidence of the two companies.
General Electric investors know that Jack Welch is only on board with the company until the acquisition with Honeywell is over. This means that General Electric will be soon losing its cash cow of a ceo and if the deal doesn’t go through then Welch will be going out on a bad note. This skepticism of whether or not the regulatory commision will accept the merger would only add to the question of General Electric moving forward positively in the future. Additionally, Honeywell may choose to go with UTC if the merger with General Electric falls through.
If Honeywell does in fact go with UTC then the market position of General Electric will be compromised and their stock will once again fall. For the Honeywell company the merger question being questioned by a regulatory commision would likely lower their stock value as well. Investors in Honeywell may fear that the deal will fall through and Honeywell will have wasted its resources. Should Bancroft sell its shares in Honeywell or should they be maintained? Bancroft should sell all or at least its shares in Honeywell because once the merger came into the picture, its price skyrocketed.
If approved, this merger will create a single powerhouse company that will dominate the jet engine market, but if it falls through there is no telling what will happen. Honeywell is obviously keen on the merger taking place and is willing to make a deal with GE. One can assume that they believe the merger with be advantageous for the company competitively and therefore, benefit the shareholders. Bancroft can sell its stock high right now, see a profit, and not be concerned with losing money if the merger falls through.
Exhibit 3 shows that when the deal with GE was proposed, Honeywell’s stock price increase significantly. This indicates that the market believes this merger will create value. The company also has an increasing net income each year, and estimates show it will likely continue to increase. Overall, Honeywell is a profitable company by itself, but in order to protect itself from a potential lose, Bancroft can sell now. What is the best position to take in GE? The best option would be to short GE. Since they are long on Honeywell, the shorting of GE stock would reduce the capital needed.
The stock could be delivered once the deal goes through. They were supposed to purchase Honeywell stock at a cheaper price which would compensate for the risk of the deal not going through, in which they would be able to turn a profit. In the end they had to get rid of the stock at a cheap price. Conclusion: The group believes that Bancroft should alter both its Honeywell and GE holdings to a lesser amount. One reason is that they may able to make a profit while the stock prices are still high. Another is that they can take care of the debt that was used to finance the capital expenditures.