GE-Honeywell Acquisition Fuels Talk of Mergers
Aerospace stocks surged Monday as General Electric Co.’s $45-billion purchase of Honeywell International Inc. fueled speculation of another wave of mergers in the aerospace industry.
As GE announced it had successfully outbid United Technologies Corp. to acquire Honeywell, investors quickly latched on to companies with similar lines of business, including airplane part makers Rockwell International Corp. and B.F. Goodrich Co.
Shares of Rockwell swelled by more than 14%, climbing $5.06 to close at $40.31, while Goodrich stock rose 5%, or $2, to close at $39, both on the New York Stock Exchange, in one of the heaviest trading days for both companies.
Many of the so-called second-tier aerospace companies may feel the need to merge to remain competitive as large airplane makers such as Boeing Co. look to do more business with fewer suppliers, analysts said.
“They don’t have the critical mass,” said Paul H. Nisbet, senior aerospace analyst for JSA Research Inc. “Boeing would prefer to go to one supplier for a number of different things, and this is causing suppliers to whittle themselves down.”
At the same time, the major prime contractors are continuing to shed their parts-making operations. Last week, Boeing sold its parts fabrication facilities in St. Louis to British firm GKN.
Prospects of another round of consolidations could have considerable impact in Southern California, where many of the potential takeover targets also have substantial presence, employing thousands of workers.
Milwaukee-based Rockwell, for instance, has about 1,400 employees in Pomona and Irvine who make in-flight entertainment equipment for commercial airlines. It also has about 300 workers at its Rockwell Science Research Center in Thousand Oaks.
Meanwhile, Charlotte, N.C.-based Goodrich employs about 3,400 workers at its Chula Vista and Riverside facilities that make jet engine parts for Boeing 737s, 747s and 767s.
Honeywell also has a large presence in the state, with about 4,700 employees. In Southern California about 2,000 employees work in Torrance at the company’s aerospace-parts facility. Torrance is also home of Honeywell’s Transportation & Power Systems unit, where about 700 workers produce turbochargers, brake systems and air coolers for trucks and automobiles.
Megamergers in the mid-1990s such as Boeing’s acquisition of Rockwell’s defense and space business eventually led to thousands of layoffs, but economists aren’t sure if the latest consolidations could lead to similar work force reductions.
“You have a lot of turmoil in the aerospace industry, and you are going to see more of this in the future,” said Jack Kyser, chief economist with the Los Angeles County Economic Development Corp. But unlike past mergers in which company headquarters were relocated to another state, “this is slightly different. I think it will be less devastating.”
Aerospace analysts and consultants said GE’s acquisition of Honeywell makes sense at a time when companies want to do more business with fewer people. Boeing, for instance, has said that it wants to whittle its supplier base from 25,500 to about 18,000. It already has eliminated about 3,000 suppliers in the last year.
With the Honeywell purchase, GE would be able to sell Boeing or Airbus Industrie, two of the world’s largest aerospace companies, a full line of products from cockpit avionics to engines to landing gear.
It would also boost GE’s ranking as the world’s largest maker of private business jets. With Honeywell, which makes engines for small planes, GE will be able to offer engines for a spectrum of aircraft from large commercial jetliners to single-engine aircraft.
The GE-Honeywell deal should prompt others to follow, analysts said. United Technologies, which made the initial bid for Honeywell but dropped out, said it was still on the prowl for another.
“I totally believe Rockwell will either be bought or sold and just can’t continue as it is,” said Matthew Wolfersberger, an analyst at McDonald & Co. Investments in Cleveland.
Boeing acquired Rockwell’s defense and space business in 1996 including operations in Seal Beach, Downey and Canoga Park.
Other potential merger partners include Providence, R.I.-based Textron Inc., which makes Bell helicopters, and defense contractor Raytheon Co., based in Lexington, Mass., analysts said.
The massive wave of consolidation after the end of the Cold War winnowed out dozens of defense manufacturers and left a highly concentrated industry. The mergers were stopped when the Pentagon in 1998 blocked Lockheed Martin’s attempt to acquire Northrop Grumman. Whether it would allow new megamergers is unclear.
