Investors Regain Confidence in Boeing; Others Don’t
(Bloomberg Opinion) -- Boeing Co. and the Federal Aviation Administration this week attempted to wrest back control of the narrative about the grounded 737 Max jet. As far as the stock is concerned, it was a success: Boeing shares ended up 5 percent on the week as investors took heart from the company’s progress on rolling out an update for anti-stall flight-control software that’s thought to have been a factor in two fatal crashes. As far as rebuilding confidence in the plane and thwarting scrutiny over the cozy relationship between Boeing and the FAA, it fell flat.
Boeing’s proposed update will make it easier for pilots to manually override the so-called Maneuvering Characteristics Augmentation System, and the software will now compare readings from two sensors before pushing the plane’s nose down. Boeing will also add more explanation of the system to manuals and offer additional training through tablets. A Boeing official told the Wall Street Journal that the changes don’t necessarily indicate the original design was inadequate but rather will make the system “more robust.” That is a stunningly tone-deaf statement given the facts: 346 people have died; pilots have complained they weren’t properly informed of the new feature and that it’s impractical to assume routine training would have been sufficient in the chaos; and the reliance on a single sensor seemingly flies in face of industry practice. A Boeing executive told Bloomberg the upgrade proved more complicated than expected, which is why it hadn’t been rolled out when the Ethiopian Airlines jet crashed this month. That raises more questions about why the company didn’t adopt a more cautious and conciliatory stance earlier. “We didn’t rush it, because rushing is the wrong thing to do in a situation like this,” a Boeing official told the Journal with regard to the software update, seemingly without a hint of irony amid criticism that the MCAS system at its heart was a tool of expediency to avoid a more dramatic redesign of the 737.
Boeing insists simulator training isn’t necessary. Avoiding that would help get the planes back in the air faster, and, according to one former engineer, let Boeing skirt a $1 million a plane penalty due to Southwest Airlines Co. Regulators were grilled by the Senate this week, and while the Transportation Department and National Transportation Safety Board pointed out past attempts to flag deficiencies in the FAA program that outsources work to the planemakers, the finger-pointing largely skipped Boeing itself. FAA Acting Administrator Daniel Elwell backed up Boeing’s contention that the Max cockpit is similar enough to previous 737 models that additional training and manual updates weren’t required, indicating the agency may bless the relatively easy and inexpensive software update as sufficient. The rest of the world is a different question. China suspended a certificate of airworthiness for the Max in a sign it will act on its own timetable when reviewing the plane’s safety and also announced a $35 billion order for Airbus SE jets that’s nearly double what was touted a year ago. Garuda Indonesia says its passengers don’t trust the Max so it’s canceling a $4.8 billion order and shopping for older Boeing models; Vietnam’s Bamboo Airways is ordering Airbus jets, a month after saying it was considering a Max order; Kenya Airways isn’t making a call on the Max yet but CEO Sebastian Mikosz says there needs to be “a very detailed and large communications exercise to explain what was wrong and what was corrected.” I don’t think we have that yet.
General Electric Co. this week announced it would team up with Rockwell Automation Inc. to offer automation and connectivity tools to drugmakers. It’s the latest example of GE gradually outsourcing and watering down its digital aspirations; the company collaborated with technology giants to boost adoption of its over-hyped Predix software platform, but the idea of partnering with an established rival in this way would have been anathema to former CEO Jeff Immelt’s vision of becoming THE digital industrial company. Recall that Emerson Electric Co. acquired GE’s Intelligent Platforms automation business last month. The reality is that no one, and certainly not GE in its cash-depleted state, has the ability to be the be-all, end-all provider of industrial software; GE’s oversize initial ambitions may ultimately prohibit it from being competitive. PTC Inc., a connectivity and augmented reality provider, initially teamed up with GE Digital, with CEO Jim Heppelmann calling the company one of its “most forward thinking partners” in 2016. PTC sold a $1 billion stake in itself to Rockwell last year, and Heppelmann reportedly said that collaboration is “many times more important to us than the GE partnership.” Analysts used to say that if GE could broker a deal with an automaker, that would legitimize its digital business. Well, Volkswagen AG announced this week that it would build its own industrial cloud with the help of Amazon.com Inc. and make it accessible to suppliers and other partners. GE’s German rival Siemens AG will plug applications from its MindSphere Internet of Things system into the Volkswagen industrial cloud to help the company suck data off factory equipment made by a variety of manufacturers and make sense of what it means.
Speaking of being sidelined, Siemens also announced an expanded cooperation agreement with China’s State Power Investment Corp. this week to jointly develop gas-to-power projects worldwide, including the digitalization of plants. This alliance, combined with Siemens’s reported efforts to combine its large gas turbine business with Mitsubishi Heavy Industries Ltd., risk undermining GE Power’s competitive position in Asia. That market is expected to be a key driver of what little demand exists for new gas turbine orders.
DowDuPont Inc., the chemical Frankenstein created by the merger of Dow Chemical Co. and DuPont Co. with the intention of being broken up, slashed its first-quarter profit forecast late Thursday. A delayed planting season amid widespread flooding in the Midwest was one factor, but most of that should be recouped. More troubling is DowDuPont’s disclosure that its commodity-chemicals arm will earn $100 million less in Ebitda than previously guided because of shrinking margins for its packaging and specialty plastics operations. That business — to be called Dow Inc. — is set to be officially spun off next week, and what an inglorious debut it will be. Activist investor Dan Loeb, who was instrumental in orchestrating the breakup, reportedly lowered his short-term estimate of what DowDuPont should be worth based on the sum of its parts. That’s likely a reflection of poor sentiment toward the commodity-chemicals unit amid trade tensions, a weaker macroeconomic outlook and overcapacity in the plastics market. It’s worth noting that New York lawmakers agreed to impose a statewide ban on most types of single-use plastic bags, part of a trend of backlash toward the material that threatens long-term demand. The ability to isolate that drag from the agricultural chemicals business and a specialty products unit that focuses on silicones, pharmaceutical ingredients and engineering resins in some ways validates the idea of the breakup. But the materials science arm isn’t exactly a company investors will be falling all over themselves to own. They also may not be thrilled about holding shares in LyondellBasell Industries NV, Westlake Chemical Corp. and FMC Corp., which could experience similar first-quarter setbacks.
DEALS, ACTIVISTS AND CORPORATE GOVERNANCE UPDATE
Wabco Holdings Inc. announced a $7 billion deal to sell itself to ZF Friedrichshafen AG, and its shares promptly plunged 10 percent. The problem was that investors’ expectations, fueled by lofty analysts’ estimates of appropriate takeover valuations, had risen too high since news about deal talks broke in February. ZF’s $136.50-a-share cash offer is actually a 6.5 percent discount to Wabco’s stock price the day before the deal announcement. On the one hand, a company is worth what someone is willing to pay for it. In the absence of other bidders and low odds that Wabco would achieve a higher valuation on its own in the near term as high R&D costs pinch its margins, this may be as good as it gets. On the other, the logic for this combination is that by combining resources and technologies, ZF and Wabco will be a powerhouse in the burgeoning field for self-driving trucks, with Piper Jaffray Cos. noting it will be hard for truckmakers to avoid doing business with them. Closely held ZF lacks an equity currency that would allow Wabco holders to continue on this ride, so I don’t blame them for wanting a little more upfront to compensate them for their company’s contributions. Whether they will get it is a different story.
Inmarsat Plc agreed to sell itself to a consortium of private equity firms including Apax Partners and Warburg Pincus for an equity value of $3.4 billion. The U.K. satellite operator had rejected a similarly priced offer from Charlie Ergen’s EchoStar Corp. last year because it undervalued the company’s prospects. Inmarsat’s change in attitude may reflect a loss of patience on the part of investors with heavy spending to upgrade its maritime networks and provide high-speed in-flight Internet to airline passengers. My colleague Chris Hughes thinks the private equity firms are getting the better deal, though. At least on the aerospace side, it feels as if we are moving toward an increasingly plugged-in world and that demand for connectivity may force more airlines to upgrade their WiFi offerings. Of note, Honeywell International Inc. manufactures the JetWave hardware that connects to Inmarsat’s broadband services and sells access to that connection through distribution agreements. There’s no obvious alternative bidder for Inmarsat at this point, so that may keep a lid on the valuation, which works just fine for the private equity firms.
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Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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