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Behind the Power Struggle That Could Sink the Honeywell-United Technologies Deal

Honeywell International Inc. Chief Executive Officer David Cote InterviewHoneywell International Inc. Chief Executive Officer David Cote Interview
David Cote, chief executive officer of Honeywell International Inc.Photo by Bloomberg Bloomberg via Getty Images

If Honeywell’s Dave Cote somehow wins his fight to purchase United Technologies, the CEO has no plans to give up his title for a while. Fortune has learned that the 63-year-old would like to lead the combined colossus for three years after the merger is completed, which itself would likely take as much as two years. That means, for Cote, the mega-deal is not a career-capping prelude to retirement. According to sources close to the talks, the GE veteran is convinced there’s no one better to run a newly formed, $90 billion plus conglomerate, and for a long time. It’s highly possible that Cote would still hold the CEO seat in 2021, when he’s 69 years old.

Anti-trust concerns are still the most likely issue to kill the deal. But if that doesn’t, the power struggle for who would run the combined company might. In mid-2015, Fortune has also learned, Cote, when he first approached UTC about a deal, offered to make UTC CEO Greg Hayes his second-in-command as president and COO. It’s easy to see why Hayes was less than thrilled. At 55, Hayes is almost nine years younger than Cote. He’d be serving as a lame duck until the deal closes, followed by three years as leader-in-waiting. In a more typical scenario, a legendary CEO near retirement age would have offered his far younger counterpart the top job as a lure to clinch a deal. But that’s not Cote, whose 14-year record at Honeywell (HON) makes him arguably the best industrial manager in America, and a commander who clearly likes to set his own rules.

Fortune previously reported that it wasn’t just anti-trust concerns that caused UTC to reject the takeover offer from Honeywell, but at least part of the problem was that Cote had offered Hayes no role in the new venture, at least in his most recent overture. That may well be wrong, as he’d already pitched the president’s job a few months earlier. Through conversations with several sources familiar with the talks, Fortune has obtained a far fuller picture of this once-secret saga that could reshape two gigantic industries.

Hayes has insisted that who’d run a Honeywell-UTC was a secondary issue, and that a deal is impossible to complete because it will never win antitrust approval. Still, the governance issues have been an obstacle all along—one that if antitrust could possibly be surmounted, might prove the next insurmountable.

It’s been reported that after meeting Cote at an industry conference in April, Hayes called Cote to discuss a possible combination. According to one of the sources, the two companies held around 17 meetings between May and July, with the CEOs convening three times, and the bankers and executives also holding talks. Originally, the two sides discussed a merger of equals, where the percentage ownership in the combined venture held by shareholders from the two camps would be determined by their market caps. At the time, UTC’s value was considerably greater than Honeywell’s, so its shareholders would have owned the bigger portion of the new UTC-Honeywell. But between April and early August, shares of UTC(UTX) fell sharply following disappointing earnings.

It is unclear if the decline in UTC’s stock price played a role in ending the negotiations. Another point of tension: In the early meetings, Hayes insisted on running UTC-Honeywell, clashing with Cote, who also coveted the top job. In a CNBC interview on February 23, Hayes stated that though the governance issue posed a problem, his biggest concern was antitrust: By July, he’d already determined that the combination would never gain approval from the Department of Justice.

The action ceased until September 30, when Cote sent a formal letter to the UTC board proposing that Honeywell purchase UTC. The price connected to that offer hasn’t been disclosed. The offer stipulated that Cote would serve as CEO for three years following closing of the merger, and would be agreeable to continuing as chairman thereafter at the request of the board.

Besides proposing Hayes for president and chief operating officer, Cote posited naming him as a director, and leader of the integration effort for combining operations of the two aerospace and building materials manufacturers. Fortune‘s previous piece incorrectly reported that Cote did not call Hayes to inform him an offer was forthcoming. Several sources confirm that Cote did call Hayes, but at extremely short-notice. Hayes wasn’t expecting the offer. The UTC board quickly rejected the proposal on three grounds: price, governance, and regulatory issues, with the latter the paramount reason.

The week of February 15th, after months of silence, Cote arranged an informal meeting with Hayes. He presented the UTC CEO with the outline of a new offer, sweetened from September, at $108 a share. According to several sources, the two CEOs did not discuss governance or succession. Hayes told Cote that antitrust obstacles and resistance from customers, notably Boeing and Airbus, made a deal impossible. It isn’t known whether the positions offered Hayes, including the COO and president positions, still stands. “We didn’t really get into the governance,” Hayes told CNBC.

Still, as Hayes acknowledged in his CNBC interview, “The fact of the matter is that governance has always been an issue.” It’s easy to see why. Given that the deal will require a lengthy antitrust review, it would take around two years to close, assuming it’s s approved at all. So the new UTC-Honeywell would emerge around early 2017. That would mark the start of Cote’s three-year tenure as CEO. Cote will be 64 on July 19th. By the time he retires, he’d be almost 69.

On CNBC this week, Hayes portrayed the proposed merger as the most undoable of deals. He stated that three law firms were unanimous in advising UTC that a merger would never win approval from the Department of Justice. “There’s just no path forward,” said Hayes. In a press release, Honeywell strongly disagreed, arguing that it did not “see the regulatory process as a material to the transaction,” and that “the value creation from a combination is significant.” Given UTC’s stiff resistance, only a hostile bid, followed by one of the most dramatic sieges in the annals of U.S. manufacturing, will secure a victory for Dave Cote.