General Electric Co CEO Jack Welch may have lost the opportunity to cement the company's leadership across its main industrial businesses by not conceding to demands from regulators to win approval to buy Honeywell Inter-national Inc.
"Had it been successful, it would have been the capstone" of Welch's 20-year reign as chief executive of the largest company by market value, said Michael Useem, a professor of management at the University of Pennsylvania's Wharton School of Business.
General Electric all but declared the US$45 billion transaction dead yesterday, saying it wasn't optimistic about winning approval after submitting a proposal to the European Commission to address antitrust concerns. Welch said the "billions" of dollars more in aerospace-related divestitures requested by regulators was too steep a price to pay.
The proposed Honeywell purchase would combine the firms' complementary businesses in aerospace, power, plastics and industrial systems. The acquisition would add about US$25 billion in revenue before asset sales. If rejected, it would be the first time the commission has acted alone to kill a US transaction.
In Honeywell's navigation and cockpit equipment, Welch lost the opportunity to add what some analysts say will be the future of how airports and airplanes communicate, called "free flight," a system designed to prevent gridlock in the airways.
The company's GE Aircraft Engines unit, the world's largest, would have been able to leverage its relationship with airlines and lessors to develop the system, expected to save airlines as much as US$12 billion when it begins to operate in about a decade.
That leverage is the heart of the commission's objections, something that Welch and others at General Electric underestimated going into the purchase. Welch is declining interviews, spokesman Gary Sheffer said.
"This is as clean as a whistle," Welch said in October at a press conference announcing the purchase. "Honeywell and GE have never showed up in a competitive situation." Welch is "a big American CEO, he's used to calling the shots," said Brian James, an analyst at Loomis Sayles & Co in Boston, which owns General Electric shares.
"He may have totally miscalculated his first meetings" with EU antitrust officials.
The effect on General Electric's bottom line won't be damaging. The company, which had US$130 billion in sales last year, will lose as much as 2 percentage points from its projected annual profit growth rate. It still predicts profit will increase 10 percent to 20 percent a year, in part because of its long-term revenue from service contracts and a backlog of equipment orders.
"GE never had to do the deal, in our opinion," said Nicole Parent, an analyst at Banc of America Securities, who has a "strong buy" rating on the stock. "We believe it was done because it made great strategic sense."
Even so, General Electric had forecast about US$3 billion in cost savings from the Honeywell purchase, half of it from aerospace. Analysts estimated that at least 50,000 jobs, or 11 percent of the combined workforce of the companies, would be cut to help reduce costs as the economy slowed.
Honeywell, which has been hurt by rising fuel costs and falling demand, is left in a less attractive position. Chairman Michael Bonsignore said yesterday that Honeywell was committed to the merger, though it has a contingency plan in place should it remain independent.
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