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GE pessimistic on merger
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June 14, 2001: 8:03 p.m. ET
GE unwilling to divest as much of Honeywell as EC officials demand
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NEW YORK (CNNfn) - General Electric Co. and Honeywell International Inc. have offered to unload large parts of Honeywell's aerospace business in an effort to win European regulatory approval for their planned $41 billion merger – but GE is not optimistic they will succeed.
Fairfield, Conn.-based GE said it and Honeywell told European Commission (EC) antitrust regulators they would sell $2.2 billion worth of Honeywell's aerospace business, but said the offer still was far short of what the regulators wanted.
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 CNNfn's Rhonda Schaffler takes a look at not-so-optimistic GE-Honeywell merger. |
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"This shows you are never too old to get surprised," said GE Chairman Jack Welch, who has been in Europe negotiating with regulators over the deal. "In this case, the European regulators' demands exceeded anything I or our European advisors imagined, and differed sharply from antitrust counterparts in the U.S. and Canada."
GE submitted its final proposal Thursday in time to meet the midnight GMT deadline, said company spokesman Gary Sheffer. The EC will continue to review the proposal until July 12 when the regulators' competitive review process of the proposed acquisition ends.
Welch met with European Competition Commissioner Mario Monti twice Wednesday and spoke with him again Thursday. GE also contacted the Bush administration and informed them of the issues aired during the meetings.
"We keep our government informed," Sheffer said. "The next step is for the EC to respond."
The regulators can now ask GE to either modify their proposal or issue a final ruling, he said.
The Commission wanted the U.S.-based industrial conglomerate to either spin-off its aircraft leasing arm, GE Capital Aviation Services, or sell shares in the unit, he said. Instead, GE proposed to set up a separate audit and management structure for GECAS and sell $2.2 billion worth of Honeywell's aerospace products.
GE was not prepared for the EC's hesitations over the merger.
"We were surprised," Sheffer said.
GE (GE: up $1.01 to $48.86, Research, Estimates) gained more than two percent Thursday while Honeywell (HON: down $5.16 to $37.10, Research, Estimates) sank 12 percent Thursday, helping pull the Dow Jones industrial average lower at midday. GE and Honeywell are two of the 30 stocks in the Dow.
Creating a titan
GE agreed to buy Morristown, N.J.-based Honeywell, a maker of aircraft engines and products for industrial heating, last October. Welch agreed to delay his retirement, originally planned for April, until the end of the year to see the Honeywell deal through.
"We have always said there is a point at which we wouldn't do the deal," Welch said Thursday. "The Commission's extraordinary demands are far beyond that point."
GE said in a statement that the proposal was its final one to European regulators.
The offer to sell aerospace assets apparently was not enough to satisfy EC's Mario Monti. The parties also were exploring steps to change the business practices at GECAS, Monti said in a statement, adding, "We regret that this avenue had not been pursued."
The EC had expressed concern that GE could use its aircraft leasing arm to help it compete unfairly against other companies.
Monti also said the EC will continue to consider GE's proposed purchase of Honeywell until it is formally withdrawn.
The combined firm of GE-Honeywell would conduct a certain percentage of its business in Europe, which places it under scrutiny of European regulators, analysts said.
European regulators are more sensitive to competitive issues, A.G. Edwards analyst Kent Newcomb said. The GE-Honeywell merger sailed through U.S. regulators but faces tough hurdles in Europe.
"The U.S. is much more free market oriented than Europe," Newcomb said. "That is changing for the better in Europe, but this is not a glowing example of that."
The Justice Department agreed in May to approve the merger after the companies agreed to sell only about $200 million in business, GE said, compared with the billions of dollars in business the European regulators want the companies to sell.
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Neither GE nor Honeywell said they are abandoning their merger, but Honeywell put out a separate statement saying it continues to support the merger but has a "comprehensive contingency plan in place if we must move forward as an independent company."
Another suitor?
Some Wall Street analysts said United Technologies may come back and try to buy Honeywell after it abandoned its bid in the face of GE's richer offer last fall.
Analyst Robert Norfleet of Davenport & Co. said he thought United Tech (UTX: down $3.16 to $77.10, Research, Estimates), a maker of jet engines, elevators and aerospace products, still is interested even though Honeywell is not as profitable as when GE announced its deal last year.
But Honeywell has been cutting costs and eventually will be bought, Norfleet said, adding, "United Technologies will gain approval more easily because it's not as much of a monopoly [as Honeywell]." 
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