Honeywell hungry for more: Cote

Q&A: David M Cote

Honeywell to identify good sources for castings, forgings & auto components in India.

Not content with 37 takeovers and over a $5.5-billion spend in the last four-year period, David M Cote, chairman and CEO, Honeywell International, is still scouting for acquisitions, to help Honeywell International grow through the inorganic route.

This would have been an impossible dream, if it were to be stated four years ago, when the company was on the verge of being merged. But not anymore.

Cote, a former General Electric man, is credited with turning around Honeywell, a technology and manufacturing group, that was on the verge of being merged with GE.

Former GE Chairman Jack Welch had even extended his retirement period to consolidate the deal which, however, failed. That is now history as Cote had taken over the company and transformed it into a $30-billion conglomerate.

Cote returns to India within weeks. The last time Cote was here, he was accompanying US President George W Bush.

In India, Honeywell wants to "identify good sources for all kinds of products like castings, forgings, automobile components and small sub-systems". The group, which had posted revenue of around $400 million through three companies "" is expected to grow 25 per cent per year.

Globally, Cote has won recognition for creating a process for acquisitions. "We are looking at growing through both organic and inorganic methods. We found that the most efficient way to grow is the organic way as its returns on investments are very high. But, acquisitions are the best cash deployment methods," Dave Cote, as he is fondly known, told Business Standard in an exclusive interview.

"If we look at cash generation, the first priority is to invest in our businesses, which we always do. We use three methods to deploy the money "" dividends, share re-purchases and acquisitions. All three are valid ways to grow the value of the company," he added.

After issuing dividends and that, too, with a 2 per cent yield, and share re-purchases of $2 billion in the last four years, Honeywell still has enough cash for acquisitions.

If the acquisition price is over $50 million, Cote himself supervises the deal, despite the company having over 250 senior "leaders".

On his second visit to the country this year "to stop by and see what is going on," Cote spoke at length on his plans and ambitions for the company - both in India and across the world.

What brings you back so quickly to India as you were here late last month with US President George Bush?

The visit two weeks ago was an ad-hoc one as it was necessary that American CEOs be present during the meeting between President Bush and Prime Minister Manmohan Singh.

This visit is more important. We now have a good presence in the country with 7,000 people when compared with four years ago when we only had around 700 employees.

Our employment base is primarily in engineering with around 4,500 people in Bangalore, about 1,500 people in Pune and 1,000 in Delhi and other places.

India is one of the growth regions for Honeywell, and it is important for me to stop by and see what is going on.

Honeywell as a company had a turbulent past - from being nearly sold to General Electric to being one of the biggest conglomorates in the world. Where do you see things as of now - have they settled down?

We have posted huge growth in the last four years from $22.5 billion to the present $30 billion. Things have changed both culturally and significantly during this period.

We were an amalgamation of three acquisitions - Honeywell, Allied Signal and Pittway - there were a lot of discussions of red verus blue. That's all gone.

Honeywell has created consistency in company processes for evaluating and paying people and devised methods for grading performances. Our warning centre was so empty that we were renting space to other companies - it is now filled. We have around 2,000 Honeywell people operating out of the centre. So, there is a huge change that has taken place.

We are still focused on four businesses, but there are some real changes in some of them. The aerospace business is still focussing pretty much on the businesses it was focussing earlier - strong presence in small jet engines of under 10,000 pounds of thrust, auxilliary power units, environmental control systems and wheel and brakes.

Honeywell still has a small presence in avionics, integrated digital cockpits, equipment for business jets that are used to avoid mid-air collision, avoid collisions with mountains and other safety systems.

We are looking at increasing our R&D presence - we have a small presence - by putting in more money. We are going to put more money into R&D for developing new products.

The big change is that we are changing organisationally, and treating all businesses as a single business that were probably treated as three different businessses and probably 15 businesses underneath. They didn't do a good job of bringing it altogether. It would have been possible for the customer to have somewhere between three to seven completely different contracts with Honeywell in a single division like aerospace.

At one point, they were up to 253 phone numbers a customer could call depending upon their needs as opposed to having just one number.

You had downsized at the same time...

We had a reduction of 2,400 people in total, but it is important to recognise that it was from the base of around 42,000 employees. It wasn't a huge number when compared with the total employee base, but it was a way of thinking on how to structure the company.

The aerospace business is around $11 billion, while that of controlled systems would be around $10.5 billion this year. About four years back, these were around $6-6.5 billion, and these businesses have grown substantially over this period. This can be attributed to both organic growth and acquisitions.

Honeywell has been banking on new prodcuts and technologies to grow organically. Comments?

Going forward, it would be entirely on new product launches. This would be same for the aerospace division too. The product push will take two to five years before we actually see the benefits. We are looking from the design point of view - products that would offer lower energy costs and higher efficency or productivity.

We have rolled out new technologies like a simple thermostat, devices that help track sound and evacuate people from buildings in case of a fire among others. In the transport business, we have rolled out turbo chargers that were a big advantage to diesel engines. Almost 50% of European turbo chargers were sold by Honeywell.

These kinds of innovative products would help us grow organically even as we would be looking at inorganic route for growth.

Your aerospace business is doing well at this point in time. How much of this is driven by the global aerospace industry, which has been growing leaps and bounds?

We concentrate on the aerospace business as it is a good industry and our business is in a robust position. Aerospace is a good industry. At the end of the day, flight hours are going to grow at around 5-7%, businesses are becoming more global, families more dispersed and airline ticket prices sliding day by day. People will continue to travel for pleasure and  business, and video-conferencing is not the way out.

Honeywell has been awarded a $4 billion avionics contract by Airbus Industrie. With the company concentrating on avionics, in addition to this contract, it requires sourcing of a lot of material from across the world. Will India figure anywhere in your list?

In terms of sourcing, we are proactively working in India and are trying to identify good sources for all kinds products. We are primarily looking at castings, forgings, auto-components and smaller sub-systems. The Indian operations, which has logged a revenue of around $400 million through its three companies, is expected to grow at around 25% per year.

Is Honeywell still hungry for acquisitions, considering that you took over 37 companies and spent over $5.5 billion in a short span of four years....

Honeywell is looking at both ways - organic and inorganic - to grow. We found that the efficient way to grow is the organic way as the return on investment (RoI) is high. We always have to look at other methods to grow, and acquisitions are a good mode for cash deployment. The first priority is to invest in our businesses, which we always do.

We use three methods - dividends, share repurchases and acqisitions - to deploy our money. Dividends are important as they help us to be competitive with our peers. We maintain it at an yield of around 2%, which is a very good payout, particulary in the US where the tax on dividends is around 16%.

Share repurchases are also a valid method for returning money. We have repurchased over $2 billion worth of shares during the last two years. Even after all that, we still have a lot of money that can be used for acquisitions. Then the question is whether you want to make acquisitions or share repurchases.

That is one way we look at what makes sense in acquisitions, at what price is it available and what is the value we can add.

Some of your acquisitions were bad moves. What steps are being taken to ensure that such mistakes do not happen again?

We had made some horrendous acquisitions in the past, and had ended up with some write-offs. We don't want to do that again. Nobody goes in for an acquisition thinking "we have money to burn, let us take a chance". Everyone goes into it thinking it gonna be a home-run.

We have commissioned a study on how acquisitions could be done, and how we could create valuations through acquisitions. We walk away from 90% of the companies we look at since we have a strong valuation model.

Our due diligence varies from business to business. Most of the problems were because of bad due diligence. The most important issue is the integration of the acquisition. People were expecting changes in the acquisition and pre-acquisition pre-views.

What is your involvement when Honeywell goes in for a buy?

If the acquisition price is over $50 million, then I personally conduct the acquisition. Of 37 acquisitions over the last four years spending over $5.5 billion, 35 are much ahead of their valuation model. This more than compensates our efforts even though two are slightly missing the target.

We have a home-grown valuation process by which we evaluate a company before actually going in for the buy.

Between India and China, which is a better country to do business with?

We are a global company, and have to grow around the globe whether it is the US, Europe, Middle East, India, China or Japan. China and India are just two pieces of that puzzle. I am very excited about the prospects, and I would say I am seeing more out of China in terms of industrial relation at this point in time than in India. But I am very much excited about the prospects of what can happen here in the country.

There is really a change in the mentality of the people in India over the last couple of years. Two years ago, I viewed it as a place where software was done and backroom office staff were housed. Now, it is much more than that. So much has changed!

There is an increasing focus on infrastructure. It is very encouraging, and we are looking at this.

Do you think China makes more sense in terms of infrastructure?

I wouldn't say it makes more sense, but I would say it is more advanced. Take a look at the number of factories being built in China and the ease of moving goods and services - not just the infrastructure of being able to transfer goods from one place to another but also the paperwork that goes along with it.

We should be able to physically and logistically move stuff and this requires a lot of permissions, which is not the easiest thing to do in India.

The Honeywell culture is well-known across the world. What was the need for creating this culture?

We had created a 12-behaviour pattern during my first six months at Honeywell. This was to create one Honeywell culture for employees around the world, to mould all the employees and businesses in the same way, and to treat and reward them equally.

There should be only one Honeywell. Culture is a number of things we are doing to create that Honeywell, that one glue.