Recent Honeywell moves raise more questions than answers

March 1, 2016
Are the company’s recently scuttled merger talks with UTC a sign of more industry upheaval to come?

Only two months have passed thus far in 2016, but the winds of change are in the air for the security industry. The services side of the market has already undergone a significant transformation with the merger of Tyco Integrated Security with Johnson Controls and the pending combination of Protection 1 with ADT following the latter’s acquisition by Apollo Global Management earlier this month. Another company that has been extremely active on the acquisitions front so far this year is Honeywell.

On Tuesday, the company announced that it has acquired RSI Video Technology, a global provider of intrusion detection systems for both commercial and residential applications under the Videofied brand, for approximately $123 million. The move comes just four weeks after Honeywell’s previously announced acquisition of aspirating smoke detection and perimeter security solutions developer Xtralis for $480 million. Also on Tuesday, the company announced that it would no longer be pursuing a merger with UTC, a story that had generated buzz and headlines for more than a week.

In a detailed statement, Honeywell said the reason it decided to forgo looking into the proposed mega-merger any further was due to UTC’s “unwillingness to engage in negotiations” and continued to dismiss the argument put forth by UTC that the deal would not have passed muster with federal regulators.

“We remain confident that the regulatory process would not have presented a material obstacle to a transaction. United Technologies felt the same way as we do when they approached us in May 2011 and in April 2015,” the statement read. “In our approach to their Chairman and their CEO on February 19, 2016, we had hoped to continue amicable and quiet discussions of a combination.  In fact, we were told by them during the meeting that such a combination would be fabulous, they would take it very seriously, and they would get back to us with questions within a week in anticipation of their upcoming Board meeting.”

For its part, UTC also released a statement on Tuesday echoing its previous concerns about the deal.

“This is the appropriate outcome given the strong regulatory obstacles, negative customer reaction and the potential for a protracted review process that would have destroyed shareholder value,” the company said.  

Honeywell, which already stands as one of the largest providers of security equipment in the world, appears to be in the midst of creating an even bigger industry juggernaut. Curiously, however, the company has also reportedly been shopping its building solutions business to potential buyers. According to the Wall Street Journal, the asset the company is currently trying to sell is a piece of the building solutions and distribution business that installs and maintains systems related to fire protection and other building emergencies. Honeywell reportedly began soliciting offers for the business about three months ago. The building solutions business is part of Honeywell’s Automation and Control Solutions unit, which accounted for $14 billion of the company’s $38.6 billion in revenue last year.  

Jim McHale, director of UK-based market research firm Memoori, wonders if Honeywell could be looking to offload the building solutions business because the company believes it will eventually be replaced by big data and Internet of Things (IoT) data services.

“Our recent report, “The Transformation of BAS to BIoT,” shows that in order to deliver a Building Internet of Things (BIoT), the level of connectivity needed to fully automate buildings will only be achieved by a massive technology input from the IT community and drastic changes to contractual procedures,” McHale wrote in a recent blog post. “BIoT for complex smart buildings will be managed through four main contacts and, of these, three will need to be handled by IT and network communications manufacturers and their system integrators. BAS services hardware will be delivered by the present product manufacturers and installed by their system integrators. However, the contract for IoT data services will require big data software and skills to further automatically fine tune the building’s performance. So if you want to be in the mix for these lucrative contracts you need to have expertise in data analytics. Currently, the big controls conglomerates like Honeywell, Siemens, Schneider Electric and Johnson Controls do not have this capability.” 

Konkana Khaund, a principal consultant with Frost & Sullivan views the acquisitions of Xtralis and RSI as a way for Honeywell to strengthen their overall position in the security market.

“Overall, I think Honeywell feels if they can consolidate their own position in security that probably gives them better positioning with (their competitors),” she said.  

McHale believes that UTC could also look to crash the proposed Tyco/JCI merger with an offer of its own, but if they don’t, he speculates they may opt to sell their fire and security businesses as well.

“We believe that if UTC doesn’t take this opportunity, they may decide to sell off their fire and security business together with building controls,” wrote McHale. “They have made little impression in these markets over the last ten years and yet are very strong competitors in all other building technologies.”

At least for now, however, Honeywell appears to be focused on continuing to grow the company through more typical acquisitions and the integration of Xtralis and RSI into its recently combined Security & Fire business will provide it with an opportunity to offer customers an even broader portfolio of solutions.

"From both an industrial logic and shareholder value perspective, Honeywell and United Technologies are a great match and that is why the two companies have been talking about a combination for more than 15 years," said Honeywell Chairman and CEO Dave Cote. "However, continuing to try to negotiate with an unwilling partner is inconsistent with our disciplined acquisition process.”