By Robert Cyran

Honeywell's NASDAQ:HON engineers have been hard at work, but their deal machine lacks the precision of the company's airplane engines and fire safety systems. A spinoff, pushy-investor campaign, split, and chunky acquisition have only managed to turn a $150 billion industrial conglomerate into one worth $160 billion. Not all break-ups run smoothly.

Housing too many businesses under one roof has been a concern about Honeywell for years. Dan Loeb’s Third Point pushed the company to cleave itself in 2017. Less than two years ago, it finally decided to carve out its specialty chemicals and materials, used in semiconductors and refrigerants, rebranded as Solstice Advanced Materials NASDAQ:SOLS. Elliott Investment Management surfaced not long after with a $5 billion stake and called for a bigger swing of the axe. The aggressive hedge fund firm argued there was scope for a 51% to 75% valuation uplift over two years by hiving off the aerospace division.

The pushiness worked, with Elliott securing a board seat and a fuller breakup, completed last month. The smaller slices, however, are hardly worth more than the entire pie. Honeywell Technologies, the $72 billion supplier of building-management and energy-storage systems, is only valued at about 11 times estimated earnings over the next 12 months, according to estimates compiled by LSEG. Peer Rockwell Automation commands a far more robust 49 times.

Honeywell Technologies is only forecast to increase its bottom line 4% next year, a third of Rockwell's growth rate. And while three separate management teams, including one for Honeywell Aerospace, might theoretically help allocate capital more wisely, there’s plenty of room for missteps.

For example, Solstice Advanced Materials, the runt of the Honeywell group, unveiled plans on Monday to buy peer Element Solutions NYSE:ESI for nearly $15 billion. The target's $640 million in projected operating profit for 2027 when added to promised annual synergies of $180 million impute an after-tax 5% return on investment, according to Breakingviews calculations. It leaves little margin of error for a business tied to the ebbs and flows of the semiconductor industry. Solstice lost 10% of its value on the news.

For all the success of some corporate disassemblage, like that of General Electric NYSE:GE, there are far more mechanical breakdowns. The median weighted excess return for investors in both parts of large separations was slightly negative from 2000 to 2022, according to McKinsey research published in February. As Honeywell is finding, even savvy manufacturers struggle to build a better M&A mousetrap.

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CONTEXT NEWS

Specialty material maker Solstice Advanced Materials, which was spun out of industrial conglomerate Honeywell in October, said on July 6 it had agreed to buy peer Element Solutions in a deal valued at $14.5 billion, including net debt.

Under the terms of the transaction, Solstice will pay $50.10 per share in cash and stock, a premium of about 15% using closing prices on July 2, the last day of trading before the acquisition was announced.

Honeywell completed its breakup plan on June 29, further splitting into Honeywell Aerospace and Honeywell Technologies.

In late 2024, activist hedge fund Elliott Investment Management said it had accumulated a $5 billion stake in Honeywell and called for it to hive off its aerospace operations. The firm argued there was scope for a 51% to 75% valuation uplift over two years by doing so.

Goldman Sachs and PJT Partners are advising Solstice while BofA is advising Element Solutions.