News: Analysis & Commentary
Commentary: Honeywell: Paying the Price for Rosy Promises
When Honeywell International Chairman and CEO Michael R. Bonsignore met with irate investors on July 10, he had a lot of explaining to do. On June 19, he had warned them that second-quarter profits would fall short of expectations and that annual profit targets might need to be trimmed as well. Now, he had the answer: For the year, growth would be more like 12% to 14%, not the 20% he once promised. Why? For one thing, rising raw material costs hurt margins, while supplier shortages cut into sales. It was one of those times when it seemed that every break went against Honeywell.BAD CALLS. Even so, Bonsignore had to acknowledge that the main reason behind Honeywell's woes was not bad luck. It was bad judgment: Simply put, the company had promised far too much about what the December merger of the old Honeywell and AlliedSignal Inc. would mean for the combined company's growth. While those promises of 20% growth in earnings helped sell the merger after it was announced a year ago June, they have come back to haunt Bonsignore. Honeywell's stock is trading at 35 15/16, 44% below the high it hit in December.
It's not a lesson Bonsignore should have needed. Sure, in taking over the merged companies, he faced a much greater challenge than he had at the old Honeywell. But he was hardly an inexperienced CEO: He had run Minneapolis-based Honeywell Inc. for six years. And while investors are now pining for the good, steady old days when Lawrence A. Bossidy was in charge at AlliedSignal, he shares in the blame, too.
As co-architect of the deal, Bossidy helped set the overaggressive targets, and then served as the new company's chairman for four months before retiring in April. "Is this really Bonsignore's fault?" asks Art Barry, portfolio manager at Federated Investors Inc., which owns more than 1 million Honeywell shares. "If you look at where the disappointment is, most of it is in the Allied businesses." At the time of the Honeywell merger, analysts had just begun to question whether Allied was running out of steam. Credit Suisse First Boston analyst Brian K. Langenberg, for example, expected Allied's earnings per share would climb just 13% in 2000, a bit off the 15% pace Wall Street had come to expect. Bossidy declined to comment.
Where did the pair go wrong? In both analysis and execution, it seems. First, Honeywell chose to stick with a too rosy scenario about oil prices and interest rates, even though there were clear signs throughout 1999 that there was substantial upward pressure on both.
Top managers didn't execute that well, either. If the company had only hedged effectively, Prudential Securities Inc. analyst Nicholas P. Heymann argues, rising oil prices would not have had such a big impact. Bonsignore acknowledges managers may have taken their eyes off the ball. "Part of it is execution," he concedes. "Had we been a fully integrated company, maybe we could have reacted more quickly in some cases."
If Bonsignore and Bossidy were the obvious culprits, the less apparent co-conspirator was the investment community itself. Analysts and investors were all too willing to buy into the merger and lofty goals--even though there was evidence in the pre-merger performances that suggested the targets would be a stretch. "You couldn't help but come up with questions about their growth rate," says Robert Friedman, an equity analyst at Standard & Poor's who gave Honeywell a rare "hold" rating.
Bonsignore is now moving to shore up credibility on Wall Street with more conservative growth targets and explicit cost-cutting schemes. Noncore and underperforming businesses, with $4 billion in revenues, may be shed, he says. Bonsignore will also cut as many as 6,000 jobs, and ask the board to approve a share-buyback program. But if he fails to get the stock moving soon, Prudential's Heymann predicts his tenure on the job may not meet original expectations either.By Amy Barrett; Barrett Is Business Week's Philadelphia Bureau Chief.