AlliedSignal move causes major ripples in aerospace supply chain
By Staff -- Purchasing, 7/15/1999
AlliedSignal's planned acquisition of Honeywell is sending ripples throughout the aerospace supply chain.The merger of the two supply giants will undoubtedly impact the way aerospace companies purchase their supplies. It's a merger that may allow the aerospace megasupplier to manufacture complex avionics systems at lower cost--some of which could be passed on to customers--while it forces competitive suppliers to become more efficient and innovative.
AlliedSignal Inc. of New Jersey has signed a definitive agreement to acquire Honeywell Inc. of Minneapolis in a stock transaction valued at more than $14 billion. The deal could be closed in the fourth quarter, and the combined company could have 1999 sales of $25 billion. The company will have a work force of more than 120,000 employees.
AlliedSignal is a $15-billion advanced technology and manufacturing company serving customers worldwide with aerospace and automotive products, specialty chemicals, performance fibers, plastics and advanced materials. Honeywell is a leading provider of control technologies for buildings, homes, industry, space, and aviation.
If the acquisition clears regulatory hurdles, it could create a powerful aerospace parts-and-electronics company named Honeywell. This company, which would serve both military and civilian customers, could become a formidable competitor for smaller players in the aerospace industry.
"The merger is an exciting natural fit of two companies whose businesses and cultures are highly complementary," says Lawrence Bossidy, chairman and CEO of AlliedSignal. "We are both successful, growth-driven technology companies who are intensely focused on performance, delighting customers, and making our workplaces world-class."
Sophisticated avionics
The new company would combine Honeywell's sophisticated avionics with AlliedSignal's flight safety products. The company would join AlliedSignal's aircraft engines, collision-avoidance systems, and other products with Honeywell's cockpit controls and global positioning equipment. The combined company's broad range of products would enable it to supply entire integrated systems, like cockpit electronics packages combining communication, navigation, and surveillance equipment. These could be supplied to customers like The Boeing Co. and Airbus Industrie, which now purchase individual parts.
Bossidy and company spokesmen from Honeywell say their combined force will create a competitor to be reckoned with. Aerospace manufacturers, they say, will be able to come to one company to find solutions rather than being forced to shop at different contractors.
"Growth and productivity will be our dual focus," Bossidy says. "Combining Honeywell's proven strengths with those of AlliedSignal will enable us to reduce cyclicality while enhancing earnings consistency.''
But for both Honeywell and the companies it will compete with, there are good points and challenges to the acquisition.
A formidable industry player
Jeffrey Nolan, an aerospace industry management consultant and president of the Connecticut-based JG Nolan Group, says there is no doubt that the planned Honeywell will be a formidable player in the industry.
"When you get that kind of critical mass assembled, the technological cross-fertilization can have benefits," he says.
Nolan says AlliedSignal probably faced two approaches as it headed toward the acquisition scheme. It could, on one hand, have been trying to narrowly focus on a particular process and technology, taking advantage of a particular area with extraordinary expertise. Such an approach carries a big risk with it. Through this narrowly focussed, technically specialized approach, the company could find itself producing technology that simply can't measure up to some of its competition.
"The big risk factor is betting on technology that will win out," he says. "It's a very high-stakes game. They can't afford to be wrong."
But Nolan says AlliedSignal is probably taking a different approach, one in which it may be trying to create portfolios of products, processes, and services aimed broadly at the marketplace. Through this approach, it minimizes the risk of working on the wrong technology, and can instead participate more broadly in a growing market.
Nolan also says any newly combined company could find itself overlapping in different areas, and possibly even competing with itself. Indeed, AlliedSignal representative Tom Crane says the companies are recognizing those areas just now. Crane says both companies, for example, produce radio systems.
But still, Crane says there is room for production of both systems in the new operation. Honeywell, he explains, creates commuter plane radio systems. AlliedSignal, on the other hand, creates air transport radio systems. "So if you look at the broad category, we overlap," he says. "But if you look at the details, we don't overlap as much as you think."
A challenge to small suppliers
Nolan concedes that if small suppliers don't meet this new competition with the correct attitude, the newly combined company will probably spell bad news for them.
With its powerhouse of a company, the new Honeywell will undoubtedly be able to produce its systems at lower cost. The acquisition will probably eliminate about 4,500 jobs of the combined work force. The company will be headquartered in AlliedSignal's hometown of Morris Township, N.J.
"Reducing price is the overriding driver for this," Nolan says. "This is all to be cost competitive. They are reducing their overhead and still managing a larger operation."
Those who buy supplies from the company say it is too early to tell if they will see some cost reduction. But companies that regularly use AlliedSignal and Honeywell parts, like the Los Angeles-based Northrop Grumman Corp., say they are eager to see what happens next. AlliedSignal was one of the prime contractors for the E-2C Hawkeye, an airborne early warning system that Northrop Grumman built for the U.S. Navy. Honeywell was a supply team member when Northrop Grumman built the stealth bomber.
"We are a user of their goods, and we will go out on a bid for anyone for our programs," says Northrop Grumman spokesman Jim Taft. "It always comes down to getting the most quality for the best price."
Honeywell is a major supplier to Lockheed Martin Corp. of Maryland, which is both a merchant buyer and supplier. Company spokesman Hugh Burns says the aerospace industry will feel an undeniable effect from the AlliedSignal acquisition. "The merger will affect the industry because there is going to be another large player," he says.
Burns says he has high hopes that the newly combined Honeywell will produce top-notch systems that will make a positive impact on the marketplace.
"Everybody is getting into the position where they will have to be the best producer of a certain piece in order to be a player,'' he says. "If their merger will produce someone new who can always generate the best piece of equipment time after time, they are going to do very well."
"You can change the names," he continues. "As long as they produce the best quality product we will look to find them and use them."
Removing cost
Burns says it would only be natural that the newly combined Honeywell will produce supplies at a lower cost than when the companies were separate entities.
"I'm sure that is what they would hope," he says. "They hope to do business more economically and cost-effectively. The aim of a merger is to create a company that is the most cost-effective and technology-based."
Nolan says the competitors for the new Honeywell should approach this acquisition the old-fashioned way: with innovation. Smaller suppliers should make themselves competitive by offering services they did not offer before. They could, for example, outsource pieces of sub-assembly on behalf of a customer. Or they could offer a different mix of services to the customer, instead of a different mix of products. "Competitors should innovate," he says. "Innovation, speed, quality, costs. In that order."
In the end, Nolan says he does not think the new Honeywell poses a major threat to the smaller suppliers.
"I just have overriding faith in the entrepreneurial spirit and the innovativeness of other competitors," he says. "There is so much pressure on the top-tier manufacturers--Boeing, Lockheed--to improve quality, delivery, and cost. If the innovative players can address those three core concerns, I have faith in them in this opportunity."
One such competitor, the California-based Rockwell International Corp., acknowledges the challenge that the acquisition will create. But Rockwell's Terry Francisco says his company will go head-to-head with Honeywell by continuously expanding its offerings.
Rockwell creates cockpit integration services for aerospace manufacturers. And like the now-forming Honeywell, Rockwell provides integration expertise to put cockpit systems together.
Francisco says Rockwell has branched out before, going from a cockpit to cabin supplier. The company, for example, now provides in-flight entertainment systems as well as the global positioning system equipment and instrument landing systems it originally produced. The lesson from this, Francisco says, is to constantly keep an expanded view and look at new ways to compete.
"The combined Honeywell and AlliedSignal will have a wide berth of products," he says. "But so do we. We are constantly looking at ways to expand in the marketplace, and that is what we are going to do to compete against companies like Honeywell."
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