Honeywell CEO Faces Test With Wall Street Awaiting ‘Signature Deal’

(Bloomberg) -- Honeywell International Inc. CEO Darius Adamczyk won over investors last year with his decision to shrink the company. Now he’s got to convince them he can grow.

Adamczyk, after he completes two spinoffs this year, will be facing mounting pressure to find the right acquisitions for his plan to expand sales and reshape Honeywell into a company based more on software. Investors will be scrutinizing the chief executive officer’s first large transaction for signals on the direction he intends to take Honeywell, and how aggressive he’s willing to be on price.

“There’s an expectation that Darius is going to make his signature deal. That’s a high expectation,’’ said Deane Dray, an analyst with RBC Capital Markets, in comments before Monday. “He also was responsible for setting high expectations when he said he will transform Honeywell into an industrial-software company.’’

Adamczyk got started on Monday with a smaller acquisition, saying it had purchased Transnorm, a German producer of warehouse automation equipment for 425 million euros ($493 million).

When Adamczyk took the reins in March 2017, the CEO’s first major move was to spin off two slow-growing businesses. Vehicle turbochargers begins trading as a separate company on Monday, the home products unit is set to be independent by the end of December.

Investors liked the strategy, driving up the shares 16 percent since Oct. 10 last year, when Honeywell announced the transactions. The increase was double the rise of a Standard & Poor’s index of 70 industrial companies and outpaces the S&P 500 Index’s 14 percent gain. But attention is already shifting to the CEO’s next act.

Honeywell CEO Faces Test With Wall Street Awaiting ‘Signature Deal’

Honeywell said it expects to close the purchase of Transnorm, which sells speedy conveyor belts systems to move along packages and has 100 million euros of annual sales, in November. The deal builds on Honeywell’s foray into e-commerce with the $1.5 billion purchase of Intelligrated in 2016. Intelligrated makes automated warehouse equipment and has been touted by Adamczyk as one of the company’s best-ever pick-ups. It was also the last sizable deal the company has made.

Honeywell has kept a $10 billion lid on cash by repurchasing shares at an accelerating pace. In the first half of this year, $1.7 billion of stock was repurchased compared with $990 million for the same period last year.

But Adamczyk has said he prefers to increase value by acquiring companies rather than just buying back shares, and has indicated he’s got a robust pipeline of potential M&A. In a July conference call with analysts he said it’s possible a deal may be announced before the end of the year.

Key Strategy

Acquisitions are a key part of the growth strategy for industrial conglomerates, said Scott Davis, an analyst with Melius Research, in an interview before Monday. Buying and selling companies is a way to adjust to the changing needs of the market. So Adamczyk will have to show he can add businesses as well as pare, he said.

“One of the most important parts of being a CEO in multi-industry land is being a portfolio manager, and portfolio managers buy and sell assets,’’ Davis said. “That’s an absolute requirement.’’

One potential obstacle: The environment for dealmaking is tough now because of high equity prices, analysts said. The S&P’s 500 Index, up 19 percent in 2017 and 9.4 percent this year, has been trading at about 21 times earnings since 2017, a level not seen in about a decade.

Still, valuations haven’t stopped Emerson Electric Co., Fortive Corp., Roper Technologies Inc. and other industrial companies from making acquisitions this year. United Technologies is about to close a $23 billion deal for Rockwell Collins Inc. it forged last year.

Deal Guru

Adamczyk is relying on a new acquisition chief, Brian Cook, who took over from Anne Madden after she was named general counsel in October last year. During Madden’s 15-year tenure, Honeywell completed 100 acquisitions, which had $15 billion of sales, while disposing of 70 companies, with $8.5 billion of sales.

Former CEO Dave Cote set a conservative tone for acquisitions with one glaring exception. Toward the end of his 15-year tenure in 2016, Cote attempted to buy rival United Technologies in an ill-fated $90 billion offer that was rejected by the target and Honeywell’s largest customers, including Boeing Co. and Airbus SE.

Adamczyk so far has been shielded from criticism over his dearth of large deals because of the strong performance he’s delivered, and Transnorm shows the company’s ability to add so-called bolt-on acquisitions. Honeywell has raised its profit forecast four times this year and posted second-quarter sales growth of 6 percent, excluding the effects of foreign exchange, acquisitions and divestitures.

Part of the success was a result of Adamczyk’s decision to keep Honeywell’s aerospace business -- which activist investor Daniel Loeb had pushed him to sell -- and instead shed other businesses.

Garrett Motion Inc., the turbocharger producer, and Resideo Technologies Inc., the home products business that includes the iconic Honeywell thermostat, will pay Honeywell a dividend of $3 billion and assume as much as $315 million of annual payments for environmental and asbestos liabilities.

More Like This

Investors want more acquisitions like Intelligrated, an “absolutely phenomenal deal’’ that Adamczyk was heavily involved in as the company’s chief operating officer, said Jeff Sprague, an analyst with Vertical Research Partners, said before Monday. Sales at Intelligrated, which supplies automated systems for moving packages through warehouses, are growing 20 percent annually as e-commerce booms. Transnorm sales are expected to increase more than 30 percent this year, Honeywell said.

Such deals will add to earnings and reinvigorate the stock price, Sprague said. So while the focus for now remains on completing the two big spinoffs, investors will soon be demanding that action follow all the talk about getting more deals done.

“Everybody is intrigued by the possibility that if they can find an effective way to deploy the balance sheet, there’s some pretty significant upside,’’ Sprague said.

©2018 Bloomberg L.P.