United Technologies CEO: Honeywell Combo Would Be Blocked, Destructive To Shareholder Value

Honeywell International Inc. (NYSE: HON) confirmed on Friday that it discussed a potential combination with United Technologies Corporation (NYSE: UTX)'s management.

United Technologies CEO Gregory Hayes followed up with a letter of his own. The executive began by stating that it evaluates all opportunities that could benefit shareholders and management previously explored combining with Honeywell "on-and-off for years" to determine if a combination would create shareholder value.

Regulatory Environment Has 'Shifted Dramatically'

Hayes continued that the regulatory environment "shifted dramatically" throughout 2015 and a combination with Honeywell would likely be "blocked outright." The executive added that even if such a combination were to be approved, the companies would need to undergo divestment and concessions that would "ultimately destroy" shareholder value.

Related Link: United Technologies Could Hit $120 On Honeywell Deal, But Selling The Move Makes Most Sense

Meanwhile, Hayes' concerns are shared by some of its largest and most important customers. Boeing Co (NYSE: BA) was quoted as saying that "healthy competition in our supply chain is vitally important to Boeing and our commercial and military customers... we would anticipate taking a very close look at the potential impact on us and our customers of a Honeywell-UTC merger of acquisition."

Embraer SA (ADR) (NYSE: ERJ) was also quoted as saying the two companies are both "major suppliers and if they become one supplier they will have an enormous stake. So that's something we are looking carefully at."

Canada-based Bombardier and Europe-based Airbus' management team expressed similar sentiments.

'Highly Aggressive' Synergy Assumptions

Hayes also added that Honeywell's proposal "grossly undervalues" his company and "overstates" potential synergies. As an example, Honeywell's assumed $3.5 billion synergy estimates are "highly aggressive" at 8.5 percent of total sales and does not include the impact of any required divestitures.

As such, the buyout offer is "not an attractive deal" for shareholders and "does not reflect United Technologies' strong long term outlook." The company remains focused on its streamlined portfolio, simplified organizational structure, continued restructuring, investments in new aerospace programs, and returning $22 billion of capital to shareholders through 2017.