In December of 2012, Morristown, New Jersey-based Honeywell International Inc. (NYSE:HON) announced its intention to purchase Everett, Washington-based bar code manufacturer Intermec Inc. (NYSE:IN) for about $600 million in cash. This deal would combine a major industrial conglomerate and a struggling niche company that had been experiencing serious financial duress. Although Honeywell’s motivations for the acquisition were not immediately clear, Intermec operates in a strategic space that just about any major consumer-focused manufacturer would want to enter.
About Honeywell International Inc. (NYSE:HON) and Intermec
Honeywell is an international machinery manufacturer with a heavy North American presence. The company develops, manufactures and distributes a wide range of systems and equipment for aircraft and airports, including turbines, radar systems, power systems, emergency measures, lighting and communication equipment. Honeywell International Inc. (NYSE:HON) also produces safety, security and automation products for homeowners and business owners. Separately, it operates a sizable materials division that synthesizes and packages volatile organic compounds, resins, imaging chemicals and other specialized compounds. It also maintains a transportation division that manufactures brake and safety systems for passenger vehicles. Honeywell International Inc. (NYSE:HON) employs over 130,000 people and earned $2.9 billion on $37.7 billion in gross 2012 revenues.
Intermec is a highly specialized outfit that got its start as a bar code programmer and manufacturer. The company now focuses primarily on developing hardware and software for RFID applications in consumer and business settings. Its auxiliary services include voice-recognition, fingerprinting, and scanning technologies. To augment the primary products and services that it offers, it maintains an in-house repair and refurbishment division to extend the lifespans of the products that it sells to its customers. In 2012, Intermec Inc. (NYSE:IN) lost $282.5 million on gross revenues of $790.1 million.
Competitors
Honeywell International Inc. (NYSE:HON) has a number of major international competitors that might conceivably have been interested in Intermec. In fact, the company has to be cheered by the fact that it beat its regional rival General Electric Company (NYSE:GE) to this property. While it would be speculative to assert that General Electric Company (NYSE:GE) was ever interested in Intermec, the acquisition nevertheless gives Honeywell a leg up over its larger competitor. Of course, GE is nearly five times the size of Honeywell and earned about seven times as much money last year. General Electric Company (NYSE:GE) had a profit of $14.68 billion in the last twelve months and cash flow from operations of $31.33 billion. General Electric Company (NYSE:GE) could certainly afford an acquisition like Intermec. One of Intermec’s major competitors is Schaumburg, Illinois-based Motorola Solutions Inc (NYSE:MSI). After focusing for years on wireless cellular hardware, Motorola Solutions Inc (NYSE:MSI) now devotes significant amounts of energy to the wireless data and connectivity markets. RFID technology represents a substantial part of this drive. For Intermec Inc. (NYSE:IN), the Honeywell acquisition offers a golden opportunity to compete with a major company like Motorola Solutions Inc (NYSE:MSI) on its own terms. Motorola Solutions Inc (NYSE:MSI) has seen a 6.1% growth in revenue over the last year. With its good profit margin, earnings actually increased over 82%.
How the Deal Is Structured
Under the terms of this deal, Honeywell International Inc. (NYSE:HON) will issue cash payments of $10 per share to all Intermec shareholders. Relative to the company’s current price of $9.80 per share, this represents a premium of roughly 2 percent. Relative to Intermec’s pre-announcement closing price of $8 per share, this deal offers a premium of about 25 percent. Honeywell will also assume the bulk of Intermec’s $68 million in outstanding debt.
Complications and Legal Issues
After a wide majority of Intermec Inc. (NYSE:IN)’s shareholders voted to approve this transaction, the last major hurdle to its completion has fallen by the wayside. As such, it seems quite likely that the deal will go through as planned. Crucially, there is no significant legal action pending on the matter.
Although the deal continues to be subject to the standard conditions that all U.S. mergers must meet, it appears unlikely that anything will arise to delay or scuttle the deal at this late hour. While the FTC has served Honeywell and Intermec with a request for additional information, such a move is quite common in mature industries that lack a breadth of major players. Indeed, neither company’s management team appears to be bothered by the slight setback. Should the deal remain on track, it may close as early as the end of the second quarter of 2013.
Long-Term Outlook and Possible Plays
Although RFID bulls have been touting the game-changing potential of the technology for many years, it has never been adopted with the fervor that many expected. Specifically, it has not yet become the de facto means by which shoppers purchase their goods. Indeed, it appears as if such “integrated” applications remain years or even decades in the future. However, RFID does have a wide range of current uses in commerce, security and other areas. Accordingly, this deal makes intuitive sense and may contribute substantially to Honeywell’s bottom line in the out-years. Given Intermec Inc. (NYSE:IN)’s poor financial situation, the acquisition is a far better short-term deal for the smaller company’s shareholders.
Going forward, it seems likely that Honeywell International Inc. (NYSE:HON) will put this new property to good use. Accordingly, investors who believe in the potential of RFID technology can pocket a small premium by purchasing Intermec Inc. (NYSE:IN) at these levels. If Honeywell experiences a post-deal dip, that premium could easily be leveraged to buy into the newly combined company at a discount.
The article The Conglomerate Makes Another Acquisition originally appeared on Fool.com and is written by Mike Thiessen.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
