Synopsis and Objective:
October 19, 2000 Honeywell’s stock was up $10 due to recent merger discussions between Honeywell and United Technologies Corporation (UTC). For every share of honeywell, UTC would pay 0.74 of its own stock. In other words, the merge would lead to a dominant supplier company in the aerospace market, and a strong competitor for GE. This led John F. “Jack” Welch Jr., GE’s chair and CEO, to call Michael Bonsignore, chair and CEO of Honeywell, to present a bid maintaining a 1:1 share for share exchange ratio. GE won the bid against UTC and agreed to a price of 1.055 GE shares for every share of Honeywell’s, plus assumed debt. The regulatory filings were submitted to the U.S. Department of Justice (DOJ) and notified the European Commission of the merger because of the large amount of European sales between the two companies. On July 3, 2001, the merger was denied. Bancroft Capital Management owns a large stake in Honeywell. Our objective is to find out if Jessica Gallinelli, managing director of Bancroft, should hold or sell the fund’s 10 million Honeywell shares and alter its short position of 10 million shares in GE.
What are the reasons for the European Union and European Commission rejecting the merger?
The EU measures the company’s degree of industry dominance and takes into consideration whether or not a merger will cause increased dominance in their associated industries. European authorities consider the perspective of competitors which could have played a major role in the Honeywell- GE merger rejection. European antitrust officials believe they saw the potential for vertical (bundling certain products) and horizontal (overlapping product lines) integration.
Mario Monti, antitrust chief of the EC, argued that Honeywell and GE’s products were complimentary which would allow different suppliers would be mixed and matched because of the trend towards open...