Old Dogs, New Tricks Catch Wall Street’s Eye

What’s the secret to keeping a company vital and successful year after year, decade after decade? Adaptability and resilience, qualities defined by Honeywell and AlliedSignal, two diversified manufacturing giants that are in the process of merging.

Wall Street is agog over the companies and the merger, on which shareholders will vote Wednesday. Since the deal was announced June 2, investors have added more than $3 billion to the market value of AlliedSignal and a comparable amount to Honeywell.

The attractions of the two are not immediately evident, but a deeper look provides a glimpse of the pressures and uncertainties driving global business today. The merger will bring together two old firms that turn out aerospace components, thermostats for homes and offices, specialty chemicals for electrical transformers and carpets. Not a hint of Internet craze or scientific breakthrough in most of the products. Brand names, other than Honeywell’s thermostats, echo from yesteryear: Fram oil filters, Prestone antifreeze, Autolite sparkplugs.

But from the mix both companies produce good profits. AlliedSignal last year earned $1.3 billion on $15 billion in revenue, and Honeywell earned $600 million on $8.4 billion in sales. The companies are doing well in 1999.

Yet both chief executives and experts on global business agree that merging makes sense. Michael Bonsignore, the 58-year old chairman of Honeywell who will be CEO of the merged company, says: “I look at the demands of the global marketplace and see that we need scale. My company, even at $10 billion in revenues, would be vulnerable.”

Lawrence Bossidy, the 64-year-old CEO of AlliedSignal who will retire next April, concurs: “I think Wall Street is excited about a broader company, one that will be more resilient.”

And Noel Tichy, management professor at the University of Michigan’s business school, says: “Scale does matter. Companies need size to be able to sustain shareholder value.”

Those are exacting terms: To win approval of investors these days, Tichy says, companies need to grow 10% to 12% a year by developing their own new products and acquiring other firms, and they need to return 16% or more on the assets employed.

AlliedSignal and Honeywell have done that, although both were fading a decade ago. How they came back speaks volumes about business today.

AlliedSignal, a descendant of Allied Chemical, Garret Aerospace of Torrance and the old Signal Oil Co. from Long Beach, was ailing in 1991 when it brought in Bossidy from General Electric.

Bossidy focused the business on higher-profit niches--selling aviation components in the more profitable repair and replacement market rather than solely to hard-bargaining Boeing and other manufacturers. He emphasized Allied’s special plastics, with qualities to withstand heat and electrical currents. He sold some businesses and acquired others. But Bossidy also devoted 5% of company sales to research and pushed development of AlliedSignal’s safety systems that help pilots avoid collisions and rough landings.

“It’s not a conglomerate from the 1960s, where headquarters told divisions to run themselves as long as they sent in a check,” says Bossidy. “You have to manage the businesses every day.” He is renowned for introducing the Six Sigma quality control system--which means tolerating only 3.4 defective parts in every million.

Bonsignore became chief operating officer of Honeywell in 1990 when the company won a $2-billion contract to provide the cockpit electronics, or avionics, for Boeing’s planned 777 jetliner. When Bonsignore became chief executive in 1993, he broadened the applications of that avionics system to other aircraft. The move had important results. “Honeywell today is the world leader in avionics systems,” says Paul Nisbet, president of JSA Research, an aerospace investment analysis firm based in Newport, R.I.

Bonsignore transformed Honeywell’s heat controls operations from supplying only hardware to providing total energy services for industrial customers, a larger and more profitable business.

Wall Street looks forward to action in the merged company, which will have about $25 billion in annual revenue. “It will have $1.5 billion a year in cash flow [income plus depreciation on older assets],” says analyst Eli Lustgarten of New York’s Schroder Securities. “There will be plenty for acquisitions.”

Bonsignore is enthusiastic. “There are excellent European companies we can acquire to expand operations globally,” he says. He foresees the merged company, which will be called Honeywell, “growing 8% to 10% a year in sales, with perhaps 6% internal growth and the rest by acquisitions.”

There are ironies and lessons in Bonsignore’s statements. In the 1980s, U.S. companies were criticized for devotion to short-term earnings and the stock price. But now all the world’s companies are subject to the dictates of global stock markets. European and Japanese companies--and firms in China, Mexico and other lands--are restructuring and striving for “shareholder value” just like Americans.

Meanwhile, U.S. companies lead the world in most industries. “I guess you could say we prevailed because had the flexibility and we adapted,” says Bossidy, who was criticized for GE policies in the ‘80s.

And what of the employees in such a world of constant change? What is their benefit?

There is opportunity to work in many fields within the company, Bossidy says, and to benefit from the stock’s value.

More than 47,000 of AlliedSignal’s 70,000 employees and 70% of Honeywell’s 57,000 employees participate in company stock plans. They have done well in the 1990s.

The 1,500 or so employees who will be laid off after the merger, as Honeywell moves its headquarters to AlliedSignal’s home in Morristown, N.J., presumably will draw severance benefits and find other work in today’s full-employment environment around Minneapolis.

For companies and people, it’s a more uncertain world than it used to be--but also one that compels constant change and rewards resilience.