Honeywell’s Future: Bigger or Smaller?

Honeywell has recently been caught between two visions about its future: one held by activist investor Elliott Investment Management, Inc., which wants it smaller and split into two parts, and another by management, which wants the company to become bigger through acquisitions.

Conglomerates are usually formed through mergers and acquisitions to achieve economies of scale, synergies, and pricing power to deliver superior returns to capital holders.

The situation has worsened in the last five years, with Honeywell shares gaining 27.46 percent compared with 88 percent of the S&P 500.

"Honeywell is an iconic pillar of the American industrial complex and remains a world-class company with market-leading assets," the letter said. "But uneven execution, inconsistent financial results, and an underperforming share price have diminished the Company's strong record of value creation over the last five years. The conglomerate structure that once suited Honeywell no longer does, and the time has come to embrace simplification."

That would include the division of Honeywell into two separate companies, reversing the early strategies, which turned it into a conglomerate.

"In order to realize its full potential, Elliott recommended that Honeywell pursue a separation of Aerospace and Automation," the letter continued. "Both entities would be sector leaders and be better positioned to thrive operationally, serve customers and employees, and create long-term value for shareholders."

However, Honeywell's management has a different strategy. It wants the conglomerate to grow even bigger through more acquisitions. For instance, in the past few months, the company closed the acquisitions of Civitanavi, CAES Systems, and Air Products' LNG business.

Still, breaking up a conglomerate has been trending in recent years as companies seek to unlock shareholder value by spinning off divisions to separate companies, focusing on core competencies, or dividing themselves into separate entities.

A few years ago, for instance, another iconic conglomerate, GE, split into three separate companies, reversing a three-decade-long policy of growing bigger with acquisitions but failing to deliver superior market returns to its stockholders.

"Elliott Management's push for Honeywell to break up reflects a broader trend among activist investors to target conglomerates, aiming to unlock hidden value by focusing on core business lines," Anat Alon-Beck, LLM, SJD, Associate Professor of Law, School of Law at Case Western Reserve University, told The Epoch Times in an email.

"For Honeywell, dividing into two companies could, theoretically, allow each new entity—Aerospace and Automation—to sharpen its competitive edge and respond more agilely to market demands, Alon-Beck said.

"However, CEO Vimal Kapur's recent M&A activity indicates a commitment to growth and consolidation, which suggests he may view the conglomerate model as integral to Honeywell's long-term strategy. This creates an interesting clash of visions for Honeywell's future, with each side believing its approach holds the key to maximizing shareholder value. This move is driven by pressure from Elliott Investment Management."

Alon-Beck thinks breaking Honeywell into pieces could create a financial windfall for Elliott.

"Activist investors like Elliott often act like 'barbarians at the gate'; they see an opportunity, sense weakness, and go after profits with intense focus," she added. "For them, this is all about maximizing value, whatever the broader consequences."

Michael Ashley, CFA, founding Partner and Chief Investment Officer at Running Point Capital Advisors, also sees merit in Elliot's proposal.

"Elliott's bold $5 billion position and call to break up Honeywell's conglomerate structure is an on-the-mark strategic push to significantly reshape the company with implications for operational focus, market valuation, and investor appeal," he told the Epoch Times via email.

"The parts should be worth more than the whole. Dedicated company management and boards could tailor strategies to its core competencies, optimizing financial leverage and accelerating product innovation, marketing, and operational efficiency."

That's why Ashley believes the call to break up the conglomerate is, in some ways, long overdue.

"Each entity could attract different investor bases and achieve higher valuations as pure-play companies," he said. "The key advantages to unlock value include enhanced operational focus, specialized leadership teams, and improved investor accountability."