In January, we wrote that large conglomerates were no longer popular, with many investors preferring specialized companies. Honeywell was already among the candidates for a demerger, initially envisaged to separate its aerospace division from the rest of the group. Announced by the Wall Street Journal, the project evolved into a reorganization into three entities, and was made official within hours.
A split for the better
Long seen as models of diversification and resilience, conglomerates are increasingly perceived as cumbersome and inefficient. Markets criticize them for high structural costs and a lack of synergy between sectors that are too far apart. Now, the trend is reversing: investors are favoring pure players, and large companies are reorganizing to adapt to this new situation.
Recent successes in this area encourage this dynamic. General Electric, for example, has been given a new lease of life following its split into three separate entities (GE Aerospace, GE Vernova and GE Healthcare Technologies). It's an inspiring model, and one which is putting Honeywell under pressure. The influential activist fund Elliott Investment Management is actively lobbying for a demerger, holding up the GE example as a model to follow. For his part, Vimal Kapur, Honeywell's CEO since 2023, announced as soon as he took office that he was studying a demerger plan, which at the time focused mainly on aerospace.
Three companies, three strategic sectors
Now official, Honeywell has not contented itself with a simple separation of its aerospace branch. The group has announced a more far-reaching restructuring, resulting in the creation of three separate companies, each specializing in a key area: aerospace, automation and advanced materials.
This transition will not happen overnight. Honeywell has already begun refocusing its upstream activities, as evidenced by the sale of its personal protective equipment subsidiary to Protective Industrial Products, Inc. a company owned by private equity fund Odyssey Investment Partners. This first step is scheduled for completion by the end of 2024.
A Berenberg study already heralded the plan as a good idea: "We believe this is a positive development, given: 1) the continued underperformance of Honeywell shares, 2) the now unjustified discount to fair value, and 3) the open letter published last month by activist investor Elliott Investment Management calling for a demerger."
An independent Honeywell aerospace business would be one of the largest publicly traded aerospace suppliers, having recorded $15 billion in revenues by 2024. The automation business recorded $18 billion in revenues last year. As a reminder, GE's aerospace unit is valued at $215 billion, which is twice as much as the conglomerate before its demerger. The three GE companies are now worth four times as much as the whole of 2022. Honeywell could well face a similar future.
