Honeywell-United Tech Deal Bigger Than Boeing, Airbus

Honeywell International's proposal to buy rival United Technologies would create an industrial giant bigger than aircraft makers Boeing or Airbus, potentially changing the balance of power between manufacturer and supplier.

Pricing power is a key concern of the big aircraft makers, and it is a central issue in the battle between United Technologies and Honeywell. United Technologies on Friday rejected Honeywell's USD$90.7 billion offer, citing customer concerns among other big issues.

With nearly USD$100 billion in annual sales and significant combined market share for such key aircraft components as wheels, brakes, power units, ventilation systems, electronics and small engines, a combined Honeywell/United Technologies would have the heft to fight price-cutting demands from customers, industry experts said.

Boeing and Airbus have encouraged small and mid-sized suppliers to merge, so they would have more financial and management depth to serve the plane makers as they ramp up production over the next several years.

That growth requires investments in machines and people that small companies may not be able to support.

At the same time, however, the two aircraft makers have pushed suppliers for price cuts, according to industry executives and filings by some suppliers.

Honeywell on Friday portrayed a combined Honeywell/United Technologies as a company that would have the resources to hold its own in this environment.

Honeywell chief executive Dave Cote, in a presentation made to United Technologies on February 19 and made public on Friday, said the two companies together would enjoy "significant commercial opportunities to drive revenue growth."

A heftier research and development budget could fund investment in new technology. And they could boost profit margins by cutting annual costs by USD$3.5 billion, reducing redundant staff and purchasing materials at higher volumes, Honeywell said.

Boeing and Airbus aren't waiting for a deal to express concern about Cote's vision.

Airbus Group chief executive Tom Enders said the deal would not be in his company's interest. Boeing said it would study the implications, saying in a statement: "Healthy competition in our supply chain is vitally important to Boeing and our commercial and military customers."

The aircraft makers have used leverage afforded by their supply contracts to renegotiate pricing for components under certain conditions, including when a company is sold.

Those negotiations can be protracted and complex, even when a big merger is not at stake. Boeing and another large supplier, Spirit AeroSystems, for example, have been in talks since November 2014 on new contracts governing parts for the Boeing 787 Dreamliner and other aircraft, according to regulatory filings and people familiar with the discussions.

While it may be impractical to shift fuselage, wing section and other large components to new suppliers, Boeing can "trim around the edges" by moving smaller parts, said a source familiar with the talks. "And those smaller parts are more profitable."

United Technologies, in a lengthy statement opposing the Honeywell overture, argued that the aircraft makers would see to it that the combined companies had to cut prices by 5 to 10 percent.

United Technologies also said Honeywell's per share offer of USD$42.63 in cash and 0.614 Honeywell share "grossly undervalues" the company.

Regulators could compel Honeywell and United Technologies to sell some operations to address antitrust issues.

United Technologies in its formal response cited the potential for divestitures that would diminish the value of the combined companies.