(Bloomberg) -- Dave Cote, who bought 100 companies and sold 70 while running Honeywell International Inc., says he knows what it takes to find the right acquisition.
“Be prepared to kiss a hundred frogs,’’ he said.
Now Goldman Sachs Group Inc. is tapping Cote’s experience from a decade and a half as Honeywell’s chief executive officer for a new partnership aimed at cobbling together an industrial operation from scratch. The special acquisition company raised about $600 million in a June 8 initial public offering, and Cote is eyeing deals that will probably range from $1 billion to as much as $5 billion.
“The sky is the limit as far as I’m concerned,’’ Cote said in a telephone interview before the offering. “If we find something good and can help it grow organically and inorganically, man, that’d be great.’’
Goldman is dedicating a team to scouting industrial targets and Cote, 65, will apply his instinct for what works. The investment vehicle, called GS Acquisition Holdings Corp., can raise debt and even more equity if needed. Cote said he’s putting in his own money in the range of “mid-single digit millions.” As part of the IPO, additional funds can be raised through an option in which underwriters can sell 9 million more share units.
At Honeywell, Cote snapped up companies to build out businesses in safety equipment, gas detection and bar-code scanning while exiting others such as auto parts. A flailing industrial company when Cote took over in 2002, Honeywell added about $90 billion of market value while paying dividends of more than $17 billion during his tenure. Roger Fradin, who helped Cote find acquisitions at Honeywell, will sit on the venture’s board. So will Jim Albaugh, who was CEO of Boeing Co.’s commercial airplane unit.
Now is a good time to hunt for industrial targets, Cote said, because companies are seeing strong demand even as investors have grown cautious on the sector. Industrial companies including 3M Co., Illinois Tool Works Inc. and Parker-Hannifin Corp. have dropped more than 10 percent this year.
The industrial world is littered with companies that have stumbled on acquisitions, said Deane Dray, an analyst at RBC Capital Markets. General Electric Co.’s market value has shrunk by $150 billion in the last two years, in part because of deals that went awry in the oil and power-generation industries.
“Not many people can do it well over a long period,’’ Dray said. “There’s a very small list of industrial CEOs who the market will say has been successful. Dave Cote is one of them.’’
‘New Hampshire Cheap’
It didn’t start out that way at Honeywell, said Cote, who touts himself as “New Hampshire cheap.’’ Investors were wary of the company doing any deals after the stock suffered because of the unwieldy collection of businesses, including a merger with Allied Signal that created warring cultures. Cote’s methodical and cautious approach to mergers and acquisitions eventually won over shareholders.
“In the beginning, no investors wanted me pursuing M&A and they just thought I was going to blow the money,’’ he said. “Interestingly, over time they started giving me a hard time for not spending the money fast enough.’’
For the new venture, the ideal candidates will be family-owned businesses in which most members want to cash out while others want to stay on board to rev up growth under Cote’s guidance, he said. A friendly option for shareholders will be a way to compete with flush private-equity firms looking for sole management control.
He’s also counting on finding talented executives within the companies he buys. His successor at Honeywell, Darius Adamczyk, was plucked out of a small maker of bar-code scanners that was purchased for $720 million in 2008. Cote turned over the top job to Adamczyk last year and handed over the chairman’s position in April.
Cote wants to replicate Honeywell’s strategy of building “great positions in good industries.” That means creating a market leader in the business segments he targets, and to offer products that have an edge on competitors through better technology.
There are some limitations. Cote has a non-compete agreement with Honeywell until 2023 in which he has to get written consent from his former employer for any business that is in competition with the company. Cote declined to discuss how or if that would limit his acquisition targets. He said he wants to look at all industrial businesses including in aerospace and specialty chemicals, where Honeywell also has operations.
Cote’s biggest acquisition attempt, a $90 billion overture to United Technologies Corp. in 2016, startled investors and quickly fell apart. In his latest venture, Cote will be focusing on much smaller deals. He said he’ll stick to his traditional play book of doing the heavy lifting on identifying the right deals and being willing to walk away from them if the price isn’t right.
“I don’t want this asterisk put at the end of my 16-year career, saying, ‘Here’s where he lost his marbles,’ ’’ he said. “I want it to be another success.’’
Line up the frogs.
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