General Electric's Proposed

Acquisition of Honeywell
YOHgot a commitment limn our managenlent: team that's deUvered to mahe this the most successfuL
acquisition in industrid1 history. And I tell you we're going todo that, and that's what's going to
/wPIJcn here Look at product line by tiroduct line, COIll/I(ntent by com/Jonent by component, anel
there is no index by any calculation one can make anywhere that Sttys there is one issue. From ((11
emotional standpoint one Hlight make a comment about it, but from ony factual base, this is the
cleanest cleal you' U ever see.
-John F. Welch Jr., October 23, 2000J

Oil March 1, 200l, Jessica Gallinelli, managing director of Bancroft Capital Man-
agement, heard surprising and somewhat disturbing news about the proposed bid by
General ElectricCompany (GE).for Honeywell International. Inc. Despite recent pub-
lie assurances about the deal from GE's chair and CEO, John F. "Jack" Welch Jr., the
antitrust regulatory authority ofthe European Conunission(EC) announced thai it had
initiated a revie\,vof the proposed merger. Gallinelli, whose fund owned a large stake
in Honeywell, considered that major development and wondered whether Bancroft
should alter its investment.
Immediately, Gallinelli instructed her associate to provide background material
on the merger, an assessment of the probability that the merger would be approved
by antitrust regulators in the United States and Europe, and valuation analyses to assist
Gallinelli in assessing Bancroft's .investment in Honeywell. She needed to decide
quickly whether to hold or sell her fund's Ifl million shares inHoneywell and its short
position of 10 million shares in GE.As a risk arbitrageur, she thought prices woulei
respond rapidly to the EC's announcement. She remembered Jack Welch's confidence

'Hcncywclllntemational Inc., U.S. Securities and Exchange Commission, File No. 1-8974.
'this case was prepared from public information by Solomon Eskinazi under the supervision of Robert F.
Bruner and with the assistance of Sean D .:Carr. It was written as a basis tor.class discussion rather than to
illustrate effective or ineffective handling of an administrative situation. The representations of Jessica
Gallineili and Bancroft Capital Management are fictional. Copyright «) 2005 by the University of Virginia
biU'Cieli School Foundation. Chariottesville,VA. All reserved. To order copies. send an e-mail to
s,[email protected]. No part oj' this publication may be reproduced, stored in II retrieval
system, used in a spreadsheet. or transmitted in anyjorm or bY any means=electronic, mechanical, photo-
copying, recording. or otherwise=without the permission of th« Darden School Foundation. Rev 9/0S.

707
70S Part Eight Valuing the Enterprise: Acquisitions and Buyouts

from five months earlier, when he said this was "the cleanest deal you'll ever see,"
and she wondered whether that were still the case.

Background on GE's Bid for Honeywell

On Thursday, October 19, 2000, GE's Jack Welch was visiting the New York Stock
Exchange (NYSE), when he noticed something unusual in Honeywell's stock price.
"1 was looking at the ticker, and Honeywell's stock was up, like, 10 bucks," he said.
"I couldn't lUJderstandit.,,2 A f(~porter explained that Honeywell and United Tech-
nologies Corporation (UTC) had just initiated merger discussions. Reportedly, UTC
would pay 0.74 shares of its own stock for each share of Honeywell. Such a merger
would create a company that could become a dominant supplier in the aerospace mar-
ket and an effective competitor with GE.
Welch had been prepared for that news. Late the next morning, Welch called
Honeywell's chair and CEO, Michael Bonsignore, to present GE's own bid for
Honeywell at a 1: I share-for-share exchange ratio. After Honeywell's attorneys told
UTC that GE had entered with a superior offer, UTC's chief executive, George David,
told Bonsignore that UTC would walk away from their deal if Honeywell's board did
not approve the UTC merger proposal by 2:30 p.m. Honeywell could not meet that
deadline, however, and UTC dropped its offer, deciding not to enter into a bidding
war with Gli, Exhibit 1 provides a timelinc of the events surrounding the competing
bids. for Honeywell.Exhibits2 and 3. offer a history of Honeywell, GE, and UTC
stock prices duringthis period. ... .:..... .: .. ..... .
OnSaturday, October 21, after hearing that] ack Welch, who had been planning
to retire, pledged to remain as head of GE through theacquisition period, Honeywell's
board agreed t~)the GE offer at a slightlyincrea~ed price of 1.055 GE shares for each
share of Honeywell, plus assumed debt. GE formally announced the deal on Sunday,
October 22, ,-WOO. The company submitted the required regulatory filings to the U.S.
Department of Justice (DOJ) on November 15,200n, and notified the EC of the pro-
posed merger on Februarya, 2001.

General Electric Companv''

In March 2001, General Electric. was ()ueof the largest .andmost diversified corpo-
rations in •the world. It generated .$130 billion in .revenues insegments as. diverse as
aircraft engines, plastics, financial services, and television production . Jack Welch had
served as the company's iconic chair and CEO for the previous 20 years, during which
time he made GE the most valuable company in the world and led it to break one
revenue and earnings record after another. Welch led more than 1,700 acquisitions ami
pushed GE into many new markets.

2Matt Murray et al., "Extended Tour: On Eve of Retircmeut.Jack WelchDecides to Stick around a Bil---
Blockbuster Move to Acquire Honeywell Puts Wrench in GE Succession Race-A Deal He Couldn't Pass
Up." Hhll Street Journal, October 23, 2000, A I,
·http://www_ge.cotl1Jen/company/companyinfo/at_Ol_gl.ance/histJeader.htm (accessed 19 December 2(05).
 Case 49 General Electric's Proposed Acquisition of Honeywell 709

The company traced its roots to J 876, when famed inventor Thomas Alva Edison
opened a laboratory in Menlo Park, New Jersey, that later became known as an inven-
tion factory, where he (leve1oped a wide range of commercially successfu I electrical
devices. By 1890, Edison had organized many of his businesses into the Edison General
Electric Company, which merged with the Thomson-Houston Company in 1892 to
form the General Electric Company. GE was listed in the original Dow Jones Indus-
trial Index in 1896, and was the only company to have remained part of the index
to date.

Honeywell
Honeywell International Inc. was a diversified technology and manufacturing COlVO-
ration with $25 billion in revenues in segments that included aerospace products and
services, power generation systems, and specialty chemicals. It was formed upon the
merger of .Allied'Signal Inc. and Honeywell Inc. in December 1999, and employed
approximately 120,O()()people in 95 countries.
Honeywell's history began in 1885, when Albert Butz patented the furnace reg-
ulator and. alarm, invented· a thermostat called the "damper flapper," and formed the
Butz Thermo-Electric Regulator Company. The company was eventually acquired by
the Minneapolis Heat Regulator Company, which merged with Honeywell Heating
Specialty.Company in 1927; .That company became Honeywell Inc. in 1963. Among
numerous innovations, the company invented the electric: autopi lot and the round ther-
rnostat, and it had operations related to gyroscopes, security systems, and computers.
It acquired Sperry Aerospace in ] 986 and had become a leader in certain aerospace
markets by 2000.
In December 1999, Honeywell Inc. completed a $ J 6 billion merger with
Alliedxignal, in a deal widely praised by Wall Street analysts. The merger of Honeywell
and Alliedxignal was expected to enhance the competitive strengths of each company,
and the CEOs predicted that these synergies, combined with cost reductions, would
increase earnings per share by at least 20% per Six months after completion of
the deal, however, Honeywell's CEO, Michael Bonsignore, explained to investors that
expected growth would not meet that prediction, and would instead be in the 12% to
14%range. Indeed, Honeywell board members did not think the company could make
significant improvement for another 18 months to two years, and there was some talk
that a potential deal with a company such as UTe or GE could provide Bonsignore
with an opportunity for "a graceful exit.,,4

Merger Considerations
Upon hearing the news of UTe's offer for Honeywell, Jack Welch realized that
such a combination could threaten GE's competitive position in several aerospace
markets. By making its own bid for Honeywell, GE would not only keep Honeywell

"Murray et al.
710 Part Eight Valuing the Enterprise: Acquisitions and Buyouts

out of UTC's grasp, thereby prohibiting UTC from becoming the leading avionics
and engines provider.but would.also materially increase its. own market power. As
a top industry analyst observed at the time: "GE essentiallywill become a gate in
. the [aerospace] business as no other company has before, and given their likely
profitability, it's hard to imagine how you would set.up a competing entity of com-
parable. scale.".)
GE also expected to remain dominant in. the market for commercial jet engines.
From 1990 to 1999, it controlled 591/f) of the market, with its closest competitors
Pratt & Whitney (a division of UTC) and Rolls-Royce plc far behind, at 16% and
13%, respectively. Honeywell would add to. GE's business portfolio another line of
turbofan power plants concentrated in the lower-thrust class, in addition to a wide
array of aircraft subsystems, such as avionics, environmental controls and aircraft
landing systernsrirrventory logistics services, repair and overhaul, and spare parts for
the commercial aircraft market. Comparable firms .and their relevant ratios are given
III Exhibit 4, while comparable transactions appear in Exhibits 5 and 6,
Welch was particularly enthusiastic about the potential synergies for the merged
companies. "Honeywell's core group of businesses-s-avionics, automated controls,
performance materials, and its new microturbine technology-s-are a perfect comple-
ment to four of GE'sfnajOt businesses [Aircraft Engines, Industrial: Systems, Plastics,
and Power Systems]," Welch said. "Not only are the businesses a perfect fit, but so
are the. people and .processes.' GE's. operating .system ·and social architecture, coupled
with both companies' C0n1.f1l0n culture based on the. initiatives of Six Sigma, services,
globalization, and e-business are also a perfect fit.,,6 Furthermore, cost and revenue
synergies of$3 billion were projected to arise from GE's merger with Honeywell,
most likely through employee layoffs and more efficient processes.
Despite the potential merger benefits, there were also risks to consider. This would
be the largest acquisition GE had ever contemplated ..Although GE had established a
reputation for its mergers and acquisitions expertise, its typical strategy was to purchase
small companies that could be easily .integrated, both structurally and culturally.
Within Honeywell there were financial problems and cultural. integration issues related
to its recent mergerwith AlliedSignal. Honeywell also-had certain low-margin, slow-
growth businesses that could drag down GE's historically high returns. Welch had to
consider potential legal and political roadblocks as wen, mainly antitrust concerns in
both the United States and. European .Uilion· (EU), and potential.protectionist policies
in theEl.I that would oppose increasing the power of majorAmerican firms.

Antitrust Concerns
As of March 200] American and European regulators had divergent views regarding
j

corporate mergers. The DOJ assessed whether the merger would substantially lessen

.IAnthony L. Velocci Jr., "GE Outmaneuvers UTe and Mergers May Be

Back in Vogue in the Aerospace Industry, and at this Stage, It's Anybodys Guess Where this Next Hound of
Consolidation Might Lead," Aviation H/,.>ek(October 30, 2(00): 28.
"Robert P. Mader, "General Electric to Buy Honeywell," Contractor (November 2(00): s.
 Case 49 General Electric's Proposed Acquisition of Honeywell 711

competition, and how prices and product innovation would subsequently be affected.
The legal standard for evaluating mergers in the EU, on the other hand, measured the
companies' degree of industry dominance, and whether or not the merged entity would
have increased dominance in its associated industries.
Procedurill differences between the DOJ and the Ee also affected their respec-
tive decision analyses, In the United States, even after the DO.r OJ' the U.S. Federal
Trade Commission approved a merger, other parties could still file lawsuits to
prevent the deal. That was not the case in Europe, however, where the European
Commission's decision to approve or block it merger was final. Further, whereas
American authorities generally disregarded competitor complaints about a poten-
tial deal and may have even considered them a reason to aiiow it deal, European
authorities respected the views of competitors and were willing to bar a deal due
to their pleas.
The majority of media reports following the announcement of the proposed
Gh-Honeywell combination suggested that it presented no problems to antitrust offi-
cials. There was minimal overlap in the companies' aerospace products, and all other
products were largely complementary. Certain. observers, however, believed the deal
would raise antitrust scrutiny, especially in Europe. Antitrust officials did not typically
endorse mergers between an Industry's biggest players, In addition, various experts
foresaw both vertical (a company's ability to tie or bundle its products) and horizontal
(overlapping product Iines,: such .as jet-engine controls) antitrust concerns.
On .March I; 200 I; the European Commission made its surprising decision to
open a full investigation into the proposedGE""Honeywelitransaction. The Ee's move
was a personal blow for Welch, who had spoken twice the previous day with Mario
Monti, the Ee's antitrust chief, arguing that GE and Honeywell's products were com-
plementaryand that "the trend toward open systems would allow customers to 'mix
and match' different suppliers.T' The EC's decision to challenge the merger destroyed
GE's plans to complete the deal by March or April, and signaled that the companies
might have to make significant concessions before obtaining approval.
Specifically, the EC expressed concerns over the increased market power of the
combined firm, and the additional leverage that GE would have over competitors and
customers. It Worriedthat the merged company could dominate the market for avionics,
on-board systems.' and engines, with deep discounts pushing out competitors and the
bundling of products forcing engine customers to purchase avionics through deals with
GE's leasing ann,.GE CapitalAviation •.. Services·.(GECAS).•The EC acknowledged that
this increased competition would lower prices Jot customers in the short run, but
expressed fear that GE's rivals would face eroding margins and not be able to keep
up in the long run, thereby decreasing competition, reducing product development in
the industry, and enabling GE to increase prices.
The EC also announced plans to investigate the financial clout that GE could
wield through GECAS, which purchased aircrafts that it later leased or sold to airlines
and cargo carriers. It was already one of the .largest aircraft buyers in the world, and

7MichaelA. Taverna. "Europe May Oppose GE~H()neyweilMerger," Aviation Week (March 5,2001): 44.
712 Part Eight Valuing the Enterprise: Acquisitions and Buyouts

many industry officials feared that the addition of Honeywell's products to GE's current
product mix would give GECAS toe) much power over its customers, which it could
leverage to sell more of the comhinedctiJupany's products: A spokesman for GE said
that GECAS bought-a rangt~ofengines·aside·from.·GE··fnodels, that aircraft purchasers
could typically choose the engine brand they wan ted installed on their aircraft, and
that GE had been "very careful for to avoid a conflict on the issue and had
never faced antitrust problems.f

Gallinelli's· Considerations
Jessica Gallinelli wondered how the news from Europe would affect the value of
her fund's arbitrage position, which had remained long by 10 million shares of
Honeywell') and short by 10 million shares of GE, with 70% ofinvested-capital bor-
rowed at 15% interest.!" Just one point of opposition would be fatal to the deal. She
wondered what the probability was that both the DOJ and the Ee would approve the
merger. Gallinelli planned to consider the regulators' different methods and criteria
when evaluating mergers. In addition, she intended to look at historical precedents to
help predict the outcome of the current case. Gallinelli noted that since the Ee began
reviewing mergers in 1990, it only blocked one of more than 400 of those proposed
by American companies, namely the.merger between WorldColtl and Sprint. This deal
was also blocked by American authorities.
Gallinelli also planned to-consider relevant personality and-political issues. Mario
Monti was known for opposing large mcrgers-Both ·MClJ'ltiand the U.S. assistant
attorney general; .Charles James, had personal interests in the outcome of the case, as
both their respective careers depended. on their results as regulators. Jack Welch was
respected by all but seen by many as extremely arrogant, and his attitude and approach
to the merger could affect its outcome. The Ee may not want two large American
companies to gain more power relative to European competitors. On the other hand,
the sc may not want to be responsible for harming the already tense U.S.-EU trade
relationship .:
How would.the unexpected .news that the·.EC:\vas initiating an investigation of
the deal affect.the stock prices ofGE and Honeywell? (Exhibit" 7, 8, 9, and 10 pro-
vide.a forecast of the financial performance forHoneywell and a completed valuation
analysis. Capital.market information appears in Exhibits 11 and 12.) Should Bancroft
Capital.Managernentsell its position ill Honeywell, or should it maintain it? Should
it alterits short position in GE?

RphilipShishkin, "(JE PlJfchase of HoneywellFacesScrutiny ili Europe-c-Competitors Are Concerned that

Combined Fi rm Wi Ii he iOO·Powerful,"· Wall Street .lOti rnal, '7 Febriltlry 2001, A12.
"Option» on Honeywell's shares were currently trading at prices that implied volatilities ranging from 33J)4%
to 51.77%. with it mean of 41.20%.
lOGallinelli had entered into the long and short positions simultaneously on October 20.2000.
 Case 49 General Electric's Proposed of Honeywell 713

October 19, 2000 Media reports potential mercer between United Technologies Company
and
October 20, 2000

,2000

October 22, 2000

November i 5, 2000
2001
March 1, 2001
7.14 Part Eight Valuing the Enterprise: Acquisitions and Buyouts

EXHIBIT 2 Trading History of GE, Honeywell, and UTe Stock

Date ••.•••.••.....
H9~.·.·~i)S·':::;·· GE$!JS UtX$lJ$ s~p5(JO•.bld¢X .'···.
l-Sep-OO 35.55 52.71 58.03 1,520.77
5-Sep-00 35.83 52.09 57.33 1,507.08
6-Sep-00 36.85 53.16 59.72 1,492.25
7-Sep-OO 34.48 53.16 59.43 1,502.51
8-Sep-00 31.55 53.96 57.91 1,494.50
11-Sep-00 32.95 53.79 58.85 1,489.26
12-Sep-00 33.35 53.22 58.85 1,481.99
13-Sep-00 33.80 53.22 58.90 1,484.91
14-Sep-00 33.85 53.16 59.90 1,48087
15-Sep-00 32.90 51.14 59.84 1,465.81
18-Sep-00 3222 51.81 60.25 1,444.51
19-5ep-00 32A5 51.36 58.61 1,459.90
20-Sep-00 31.55 51.03 59.43 1,451.34
21-Sep-00 32.00 50.69 58.26 1,449.05
22-Sep-00 32.73 51.64 61.30 1,448.72
25-Sep-00 32.05 52.32 62.47 1,439.03
26-8ep-00 32.39 52.26 62.82 1,427.21
27-Sep-00 31.44 53.56 64.40 1,426.57
28-Sep-00 32.84 53.16 66.92 1,458.29
29-Sep-00 32.11 52.21 64.93 1,436.51
2-0ct-00 32.45 52.84 63.88 1,436.23
3-0ct-00 33.52 53.34 66.10 1,426.46
4-0ct-00 34.14 53.18 66.04 1,434.32
5-0ct-00 33.02 53.96 6809 1,436.28
6-0cl-00 32.90 53.68 67.39 1,408.99
9-0cl-00 33.29 52.84 65.57 1,402.03
10-0ct-00 32.84 52.44 67.21 1,387.02
1i-Oct-OO 32.50 51.15 66.92 1,364.59
12-0cl-00 31.55 49.22 63.64 1,329.78
13-0ct-00 31.21 51.48 65.22 1,374.17
16-0ct-00 32.28 5216 67.44 1,374.62
17-0ct-00 31.77 50.24 65.22 1,349.97
18-0ct-OO 30.37 50.13 63.99 1,342.13
19-0ct-00 32.34 50.24 59.90 1,388.76
20-0ct-OO 41.46 47.08 60.84 1,396.93
23-0cl-00 45.01 44.93 59.43 1,395.78
24-0ct-00 48.05 48.21 60.54 1,398.13
25-0ct-00 47.09 47.81 59.90 1,364.90
26-0ct-00 47.04 47.08 62.24 1,364.44
27-0ct-00 46.42 47.19 62.94 1,379.58
30-0ct-00 48.45 48.77 64.46 1.398.66
31-0ct-00 48.50 49.50 65.34 1,429.40
l ..Nov-OO 48.22 49.17 64.23 1,421.22
2-Nov-00 46.99 48.49 64.34 1,428.32
3-Nov-00 46.54 48.15 62.82 1,426.69
6-Nov-OO 47.66 49.22 65.34 1,432.19
7-Nov-00 48.90 49.62 63.70 1,431.87
8-Nov-00 48.22 49.28 63.35 1,409.28
9-Nov-00 48.39 49.28 63.58 1,400.14
10-Nov-00 48.11 48.66 61.95 1,365.98
 Chapter 49 General Electric's Proposed Acquisition of Honeywell 715

EXHIBIT :2
,b~t~r,;;:'
,j),,,;,••,' . '"'.,'"1'l~~~$O$ QE$O$ q'l"¥i$,!.\1$'("·'i i>·.',·.i,'..·S&P500t'ttlex',
13-Nov-00 45.63 46.46 61.83 1,351.26
14-Nov-00 46.76 47.64 63.00 1,382.95
15-Nav-00 46.54 47.42 62.98 1,389.81
16-Nav-00 46.59 47.53 64.38 1,372.32
17-Nov-00 46.14 46.86 65.15 1,367.72
20-Nov-00 44.55 45.21 64.80 1,342.62
21-Nov-00 45.12 45.84 65.73 1,347.35
22-Nov-00 43.65 43.86 65.91 1,322.36
24-Nov-00 43.99 44.60 67.55 1,341.77
27-Nov-00 43.99 44.37 65.68 1,348.97
28,Nov-00 44.44 44.99 64.21 1,336.09
29-Nov,00 43.70 44.88 65.15 1,341.91
30-Nov-00 44.10 44.76 66.50 1,314.95
1'Dee-OO 45.18 46.06 66.20 1,315.23
4-Dec,00 45.80 46.63 68.14 1,324.97
5-Dec,00 47.89 48.89 71.25 1,376.54
6-Dee-00 47.89 48.72 70.78 1,351.46
7-Dee,00 47.61 48.32 70.72 1,343.55
8'Dee-00. 49.30 49.85 70.25 1,369.89
I1-Dee-00 49.93 49.95 67.85 1,380.20
12-Dec,00 47.16 47.70 69.02 1,371.18
13,Dec,00 47.16 47.87 67.26 1,359.99
14-Dec"00 45.74 46.46 66.85 1,340.93
15-Dee-00 43.31 44.99 66.85 1,312.15
·18-Dee-00 45.00 46,06 69.31 1,322.74
19-Dee-00 44.22 45.28 70.19 1,305.60
20-Dee-00 41.61 4285 68.85 1,264.74
21-Dee-00 41.89 43.24 70.43 1,274.86
22-Dec,00 43.20 44.15 71.37 1,305.97
26-Dec-00 43.42 44.54 72.95 1,315.19
27-Dee-00 43.02 43.67 74.89 1,328.92
28-0ec-00 43.37 43.89 73.89 '1,334.22
29-Dee-00 42.80 43.44 73.83 1,320.28
2-.jan-01 40.03 39.64 70.66 '1,283.27
3-Jan-01 43.54 43.32 70.55 1,34"1.56
4-Jan-01 43.48 43.55 69.08 1,333.34
5-Jan-01 42.46 42.87 66.79 '1,298.35
8-Jan-01 41.33 41.28 67.96 1,295.86
s-Jan-ot 40.43 40.44 6632 1,300.80
10-Jan-01 4088 40.49 67.85 1,313.27
II-Jan-OI 42.86 42.19 69.37 1,326.82
12-Jan-0'1 42.06 41.40 66.38 1,318.32
16-Jan-01 43.31 42.93 66.61 1,326.65
1?-Jan-01 43.42 42.31 67.73 1,329.4"1
18-Jan-01 44.22 43.16 68.61 1,347.9"1
19-Jan-01 43."17 42.59 66.73 1,342.54
22-Jan-01 42.57 41.45 67.50 1,342.90
23-Jan-01 43.31 42.31 68.32 1,360.40
24-Jan-01 42.86 41.96 68.55 1,364.30
25-Jan-01 42.80 4163 70.96 1,357.51
(continued)
7 J(j Part Eight Valuing the Enterprise: Acquisitions and Buyouts

.. H:ON'$OS ..:..:-....._._. _
.. _. _. '_" ~:....
GE$IJS;::( ~:.....:.~:...

26-Jc.in-·Ol 42.()1 40A4 58.G? 1;354.95

29-dah~01 41.43 40.21 69.12 1,364.17
30·Jah-Ol 42.85 41.91 69.89 1,373.73
cli··Janc01 42.74 4'1.(')6 70.41 1,366.01
I-Feb··01 43.19 41.89 69.6::; '1,37347
2-Feb-()1 43.15 41.93 69.45 1,~I49.47
5··feb-Ol 44.71 43.36 69.68 1,354.31
6-Feb-Ol 44.55' 43.13 69.H3 1,352,26
7-Feb-Ol 43.92 42.54 69.73 1,340.89
8-feb-01 44.13 42.71 70.44 1;332.53
9-Feb-Ol 42.70 41.37 70.32 1,314.76
12-Feb-Ol 44.38 43.05 7043 (330.17
13-Feb..01 44.05 42.73 72.68 1,318.80
14-Feb-Ol 43.12 41.92 72.52 '1,315.92
15-Feb-Oi 44.05 43.48 74.40 1,326.61
1G-Feb-e)'l 43.78 42.59 73.70 1,301.53
20·Feb-Ol 44.68 43.21 '74.17 1,278.94
21-Feb-Oi 44.20 , 42.86 74.52 1,255.27
22·Feb-Ol 43.11 42.68 73.88 1,252.82
23-Feb'01 42.69 41.84 ,.... 72.75 1,245.86
26-Fel)·Ol 44.21 43.48 73.88 1,267.65
27-Feb'01 43.73 4349 75.01 1;257.94
28-Feb;01 42.44 42.13 73.38 1,239.94
t-Mar-Ot 41.60 7347 1,241.23

Source: http://finance.yahoo.com (accessed on September 26, 2005).

Not.e: urc» stock ticker is "UTX."
 Case 49 General Electric's Proposed Acquisition of Honeywell 717

II 120,001""'"'""'""""""'"""""'"""""""""'"""""'''"''"""""
o
Q
Q
C\I

Source: http://finance,yahoo.com (accessed September 26, 2005),

718 Part Eight Valuing the Enterprise: Acquisitions and Buyouts

Financial Data for Comparable Firms

U.S.

Emerson Electric Co. $ 28,691 $62.76 0659 $14.98 $ 15,164 $ 281 $ 4,319 $ $,762
Textron Inc. $ 1,599 $43.89 0.893 $28.28 $ 16,370 $ 289 $ 6,974 $ 12,376
Tyeo International Ltd. $ 95,528 $54.98 0.953 $10.11 $ 40,404 $ 1,265 $ 9,734 s 23,371
United Technologies s 36,671 $66.58 1.304 $16.29 s 25,364 $ 748 $ 4,063 $ 17,270
General Electric Co. $460,759 $46.74 1.242 $ 5.08 $437,006 $13,223 $188,089 $386,514
Honeywell Int'!. Inc. $ 37,615 $41,36 0.988 $12.02 $ 25,175 $ 1,196 $ 4,427 $ 15,468

s
$ 1:3,090
Tyeo International Ltd. 1684.51 $ 28,932
United Technologies 470.31 $ ·26,583
General Electric Co. 9932.01 $128,051
Honeywell lnt'I. Inc. 807.29 $ 25,023

Textron Inc. 3.91 2,98 60,36 28.37 1,55

Tyee International Ltd, 3.54 16.11 12,88 22,64 20,49 5.44
United Technologies 1.33 9.97 8,35 19,57 17,32 3,87
General Electric Co. 5,09 15,68 12.43 51,22 36.45 9,19
Honeywoll lnt'l. Inc, 1.51 9,20 7.22 22,79 20,13 3.44
Median 1.76 10.27 8.34 22.72 20.31 4.03

Source: Standard and Poor's Research Insight,

 Case 49 General Electric's Proposed Acquisition of Honeywell 719

Financial Data for Comparable Transactions: Aerospace Industry

Announcement 'date"
Transaction value (Srnit)
Equity value ($mil) $5,420
Long-term debt/equity 1.24
Total debt/equity 0.89 1.59
Target price/equity na 17.50 22.00 19.75
Target price/book 4.60 7.00 24.10 7.00
Enterprise value/net sales 1.12 2.16 2.23·· 2.16
Enterprise value/cash flow 10.09 9.58 12.69 10.09
Enterprise value/EBIT 12.19 11.64 13.92 12.19
Equity value/net income na 17.19 22,22 19.71
Offer price/book value 4.62 6.99 24.09 6.99
Offer price/EPS na 17.54 21.98 19.76
Stock price/book value
(4 weeks prior) 3.85 4.54 16.72 4.54
Premium over stock price:
1 day prior (%) 0.62 20.69 28.44 20.69
.tweek prior (%) 22.71 3B3 34.48 31.93
1month prior ('Yo) 20.08 54.08 44.14 44.14
Consideration offered stock cash, stock, and collar stock

na ~ not available.
Source: Thomson SDC Platinum.
720 Part Eight Valuing the Enterprise: Acquisitions and Buyouts

Financial.Datafor Comparable Transactions: Jumbo Deals"

Announcement dale
Transaction value (Smil) $55,040
Equityvalue ($mil) $48,174
Long-term debt/equity 0.35 0.50
Total debt/equity 0,45 10.91 0.56 149
Target price/equity 23.20 2800 15.30 23.20
Target price/book 6.80 3.10 45.10 2.80 4.95
Enterprise value/net sales 2.92 1.60 4.49 0.94 2.26
Enterprise value/cash flow 8.16 9.33 10.63 8.35 8.84
Enterprise valuefEBIT 14.61 16.66 18.60 12.37 .15.64
Equity value/net income 23.52 22.84 31,47 15.55 23.18
Oller price/book value 6.76 3.07 45.14 2.79 4,92
Offerprice/EPS 23.17 23.18 28.01 15.34 23.18
Stock price/book value
(4 weeks prior) 7.12 na 30.14 2.38 7.12
Premium over stock price:
t.day prior (%) ~2.72 na 32,48 17.68 17.68
1 week prior (%) '--2.72 na 50.11 22,55 22:55
1 month prior (%) '--4.94 na 49.77 17.51
Consideration offered stock .: .< stock stock, liab. stock, liab.

"Jumbo deals are those whose transaction value is $40 billion or more.
na = not available.
Source: Thomson SDC Platinum.
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 Comparable firms: .' .:
Enterprise value as a multiple of:
2000 revenue 1.33 26,775 81,996
Per share 33.41 102.31
2060 EBlt 1056 23,874 47,543
Per share 29.79 59.32
2000 EBITDA 8.33 37,742 18,775 31,218
Per share 23.43 38.95
2000 net income 21.90 37,566 29,804 31,042
Per share . 37.19 38.73
Equity value as a multiple of:
2000 EPS 18.86 28.37 47,073
Per share 58.73
2000 book value 3.87 5.44 52,780
Per share
Median equity value

73,067 21,501 66,543

26.83 83.03
47,964 28,570 41,440
Per share 35.65 51.71
Equity value as a multiple of:
2000 net income 17.19 28,518 39,020
Per share 35.58 48.69

2000 book value 29,800 233,842

Per share 37.18 291.77
2000 EPS 17.54 23.18 29,105 38,456
Per share 36.32 47.98
Premium over stock price:
One day prior 0.62 28.44 33,434 42,678
Per share 41.72 53.25
One week prior 22.55 34.48 31,803 34,899
Per share 39.68 43.54
One month prior 17.51 49.77 29,713 37,870
Per share 37.07 47.25
Median equity value
Per share
"Excludes outliers from data in Exhibits 5 and 6.
Source: Case writer's analysis.
726 Part Eight Valuing the Enterprise: Acquisitions and Buyouts

H~r1eywellValLiCitibn.Trlanquiation
(per~shareamounts in U.S. dollars)

L6W···Valt:i~..•.
··•·.·.·.··
.
Recent market prices . $36.85
Peer firms (median) $59.03 $23.73
DCF $40.98 $ 942
Peer transactions (median) $50.20 $36.70 $13.50

Source Case writer's analysis

Peer
$60 1·-··------·---···"···-···-········,·
,. . firms ' , "..' .,'.' , '.' "" , ·····-·--·..-..~·..-I

Source: Case writer's analysis.

 Case 49 General Electric's Proposed Acquisition of Honeywell 727

EXHIBIT 11 Yields on U.S. Government Bonds

s-month 4.843%
6-month 4.679%
2-year 4.402%
a-year 4.607%
5-year 4.646%
10-year 4.872%
30-year 5.292%

Source: Bloomberg LP.

3~lnorith 5.370% 5.731% 5.936% 7.550%

'6-month 5.145% 5.516% 5.682% 7.502%
1-year 4.998% 5.379% 5.555% 7.473%
2~year 5.037% 5.506% 5.712% 7,579%
3-year 5.233% 5.682% 6.034% 7,773%
4-year 5.321 "/0 5.790% 6.121% 7.880%
5-year 5.497% 5.917% 6.297% 8.034%
7-year 5.692% 6.112% 6.589% 8.266%
a-year 5.799% 6.229% 6.735% 8.421%
9-year 5.887% 6.326% 6.745% 8.479%
10-year 5.868% 6.326% 6.735% 8.517%
15-year 6.170% 6.735% 7.172% 8.932%
20-year 6.307% 6.988% 7.347% 9.086%

Source: Bloomberg LP.