Playing Take-away

With its 11th-hour acquisition of Honeywell, General Electric is engaging in M&A's most dangerous game.

It’s destined to be a textbook study for students of merger-and-acquisition techniques. On a Thursday afternoon last October, Jack Welch caught wind of United Technologies Corp.’s negotiations to acquire Honeywell International Inc. for $40 billion in UTC stock, and charged up his troops to steal the deal. By Friday, the General Electric Co. CEO had personally faxed Honeywell an 11th-hour offer, valued at $45 billion in GE stock.

Unwilling to enter into a bidding war, UTC withdrew, and by Sunday afternoon GE had signed the papers for the biggest acquisition in its history.

Such take-aways are happening a lot lately. One reason is a decrease in acquisition opportunities, says Warren Batts, adjunct professor at the University of Chicago and former Tupperware Corp. and Mead Corp. CEO. As industries consolidate, “the number of possible attractive mergers is diminishing, and those that really change your company are getting fewer and farther between,” he explains.

But a take-away acquisition is fraught with hazards. If, as numerous studies show, most acquisitions actually lessen shareholder value– thanks to overpricing, underanalysis, or poor integration, among other factors–the 11th-hour competing bid is even more vulnerable to disappointment. It’s a merger approach that severely tests valuation disciplines, putting things on a perilously fast track, pressuring bidders to consider the capabilities and motivations of the other suitor–not just the target company–and tempting acquirers to see “winning” as something other than obtaining benefits for their own shareholders.


Defying the odds, some companies have managed to play a superb game of take-away. A classic is considered to be the deal seven years ago that formed Northrop Grumman Corp.– a defense contractor in the M&A news again by virtue of its year-end agreement to acquire Litton Industries Inc.

Back in 1994, acquisitive arms-maker Martin Marietta Corp. had just announced that it had signed a deal to merge with Grumman Corp., marking what appeared to be one more step in Martin’s inevitable path to aerospace gianthood. But the smaller Northrop played David to Martin’s Goliath. Northrop, best known for its B-2 bomber, had been rapidly expanding into the same electronic-warfare areas that had become Grumman’s strength. Seeing value in the neat fit of the two operations, it topped Martin’s $1.9 billion bid with a winning $2.2 billion cash offer.

“Yes, quite frankly, we did have to scramble to decide what to do,” recalls Northrop Grumman CFO Richard B. Waugh Jr. Like GE in the Honeywell case, Northrop was surprised by the near-completion of a deal that had taken place secretly. Northrop, in fact, believed that it had been moving toward its own pact with Grumman when the Martin-
Grumman agreement was disclosed. “It really was a catalyst to get us to think about how serious we were, and what we would have to do to quantify that seriousness,” says Waugh.

What made Northrop’s fight against Martin exemplary? One quality was the vision of Grumman’s defense electronics lines being just what were needed for Northrop’s strategic development. “One characteristic of good mergers is that they’re very focused–with both companies in exactly the same industry, and with the buyer having a good track record,” says Thomas Lys, a professor who has analyzed countless bad and good deals with Merger Week, the executive-education program that Northwestern University’s Kellogg Graduate School of Management has conducted for 23 years.


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