Graham Warwick/WASHINGTON DC Emma Kelly/LONDON
The agreement by AlliedSignal and Honeywell to merge after a long on-off affair is testament to the growing urgency to consolidate the supplier industry following massive mergers among US aerospace and defence prime contractors.
The move is also in line with a trend towards the supply of total aircraft avionics, with AlliedSignal products set to fill the gaps in Honeywell's avionics portfolio. "The customer is opting for fewer suppliers providing a larger content," says Honeywell chairman and chief executive Mike Bonsignore. The merger also provides increased cashflow to fund acquisitions and should reduce exposure to industry cycles.
The deal - which the companies say was made possible by agreements over the name and home base of a merged entity - follows TRW's $7 billion acquisition of LucasVarity, United Technologies' (UTC) closure of a $4.3 billion merger with Sundstrand and a $2.2 billion move by BFGoodrich for Coltec Industries.
The AlliedSignal-Honeywell merger will create a business with annual aerospace sales topping $10 billion, covering avionics, engines and equipment supply. The company will take Honeywell's name.
Despite the name change, AlliedSignal is driving the $14 billion deal and will issue the stock that will be exchanged for Honeywell shares. The new corporate headquarters will be at AlliedSignal's Morristown, New Jersey, site rather than Honeywell's Minneapolis base. AlliedSignal chairman and chief executive Larry Bossidy will chair the new company, but will be succeeded by Bonsignore (who becomes chief executive) when he retires in April.
The combined aerospace business will be based in Phoenix, Arizona, home to Honeywell's commercial avionics business, with AlliedSignal recently moving its aerospace group base there. The division will be headed by Bob Johnson, now president of AlliedSignal Aerospace.
Among major activities, only the wheels and brakes operation of AlliedSignal Aerospace remains outside Phoenix, leading to suspicions that the business will be a candidate for sell-off following a wider reorganisation planned over the next three months - particularly if AlliedSignal's legal efforts fail to block landing gear specialist Menasco joining BFGoodrich as part of the Coltec merger.
Although the "new" Honeywell's effective $23.5 billion 1998 revenues make it of a similar size to UTC, the merged company dwarfs other second-tier suppliers in terms of its avionics and equipment sales. Of its projected 1999 turnover of $25 billion, some $7.5 billion, or 30%, is expected to come from this sector, putting it ahead of commercial avionics rival Rockwell Collins, which had 1998 sales of $2.2 billion, and Sextant Avionique, with sales last year of $800 million.
BFGoodrich/Coltec have aerospace sales of over $3 billion, as will UTC's merged Hamilton Standard and Sundstrand. The latter is AlliedSignal's biggest competitor in auxiliary power units, with the new Honeywell likely to derive about 16% of its income from turbines.
Although overall aerospace revenues account for less than half of the merged company's projected 1999 figure, cost and sales synergies in the sector are considered the major drivers behind the merger. The companies hope to combine Honeywell's strength in cockpit systems with AlliedSignal's muscle in safety products to win more business from aircraft manufacturers.
AlliedSignal is a leader in safety systems, including traffic collision avoidance systems, the enhanced ground proximity warning system, flight data and cockpit voice recorders, weather radar and windshear detection.
Honeywell is a major player in the communications, navigation and cabin system markets, with a cockpit avionics product range including air data, flight control, flight display, flight management, inertial reference and onboard maintenance systems. The most significant product line overlap is in weather radars and traffic alert and collision avoidance systems. AlliedSignal's Bendix/King avionics operation competes with its partner in some military applications, but is best known as a general aviation systems supplier.
The deal will also allow AlliedSignal to move into the passenger cabin. Honeywell, with its UK partner Racal, is a leading supplier of Inmarsat satellite communication avionics which allow passenger and cockpit communications, and also has a strategic alliance with inflight entertainment (IFE) system leader Matsushita. The new Honeywell's main avionics competitors - Rockwell Collins and Sextant - are in the IFE industry through acquisitions.
AlliedSignal will gain access to the airport market through Honeywell's Airport Systems division.
Aerospace will contribute savings of $90 million in administrative costs and $30 million in overlapping avionics research and development. The company plans to cut 4,500 jobs from 120,000.
Source: Flight International
