Honeywell: Splitting or Optimization? An Analysis of the Arguments

The industrial conglomerate Honeywell is facing a proposal from the hedge fund Elliott, which envisions a split into standalone aviation and automation companies. Elliott argues that this structural change could enhance corporate value and facilitate access to capital, as separate companies might receive better credit ratings. The hope lies in more efficient corporate management and margin improvement, which could indeed attract investors. However, not all of Elliott's arguments are convincing. Particularly, the decline of the Safety and Productivity Solutions (SPS) segment is being addressed, with this setback, from Elliott's perspective, not clearly attributable to the conglomerate structure. Rather, recent years have been marked by cyclical challenges, as various markets settled back after pandemic-induced peaks. These include the rapid rise and subsequent decline in demand for personal protective equipment (PPE) and investments in warehouse automation, which have now stabilized. Another weak point in Elliott's plan is the assumption that a new "Honeywell Automation" business would be valued in line with other automation companies. The plan envisions combining industrial and building automation with Universal Oil Products (UOP) under one roof. However, the assumptions about market valuation could prove to be optimistic. An alternative strategy that Honeywell is already pursuing involves the gradual restructuring of the company. Management plans to spin off the advanced materials segment and sell off the PPE division by 2025. This methodical approach is reminiscent of the path taken by General Electric under the leadership of CEO Larry Culp. For investors, the question arises whether Honeywell is a worthwhile investment right now. Current recommendations from analysts, such as the Motley Fool, suggest that other stocks are currently considered more promising. Nonetheless, Honeywell remains attractive to value-oriented investors, especially if management continues to pursue such coherent strategies.