Why Is Honeywell Buying Intelligrated?
Summary
Honeywell has agreed to acquire Intelligrated.
The purchase provides insight on the company's growth strategy.
Honeywell is sneakily becoming a tech company.
Honeywell (NYSE:HON) has agreed to acquire Intelligrated, a leading supplier of warehouse automation technologies, from Permira for $1.5B in cash (approximately 12x estimated 2016 EBITDA). The company outbid Toyota (OTCPK:TYIDY) for the business, which Honeywell will add to its Sensing and Productivity Solutions division in its Automation and Control Solutions Segment (36.6% of total revenues in 2015). With growth sluggish in many of HON's legacy businesses, the purchase provides some important insight on how Honeywell plans to combat a prolonged period of widespread macro weakness.
Intelligrated makes warehouse automation solutions, software and services that result in "smarter distribution and fulfillment operations." The firm was founded in 2001, and has operations in the US, Canada, Mexico, Brazil, and China. Intelligrated primarily serves customers in the e-commerce sector, but operators in the retail, wholesale, food and beverage, packaged goods, pharmaceutical and medical supply, and third party logistics industries also use its services. Intelligrated's customer base includes 30 of the top 50 US retailers, half of the top 100 Internet retailers, and a host of leading consumer product companies.
Since 2001, Intelligrated has achieved rapid growth through a mix of acquisitions and innovation. Over the past three years, it has grown revenues at a 13% CAGR. Honeywell estimates that the firm will generate $900 million in sales in 2016, which equates to roughly 6.4% of Honeywell's Automation and Control Solutions segment revenues. Honeywell is looking to consolidate its portfolio around sustainable long-term growth opportunities, and the purchase of Intelligrated is the latest example.
The rise in e-commerce activity has made companies such as Intelligrated popular acquisition targets as retailers needed to cut costs and "modernize their distribution centers." As Alex Ismail, head of Honeywell's Automation and Control Solutions segment explains, "e-commerce continues to grow at an unprecedented rate and customer demands for faster delivery times have created a need for warehouse, logistics, and fulfillment solutions that can increase productivity and lower costs for customers." As the percentage of transactions taking place online continues to increase, Kion Group AG (who recently purchased Dematic, a rival of Intelligrated) expects the market for supply chain automation to grow at a 10% annual rate through 2019.
The Intelligrated purchase provides some transparency into Honeywell's long-term strategy. Honeywell is sneakily becoming a tech company as it looks to expand its portfolio around software-based innovation. Like General Electric (NYSE:GE), Honeywell is seeking to transform how businesses operate by leveraging the "Industrial Internet of Things." According to honeywellprocess.com, The Industrial IoT, or "Smart Manufacturing" represents a "digital transformation that shifts the sources of competitive advantage away from physical machinery toward information."
Through data, HON plans to make companies more productive and more profitable, and the Intelligrated business seems to fit the bill. As John Waldron, president of the Sensing and Productivity Solutions division explains, "[Intelligrated] complements the existing portfolio of industry-leading workflow performance solutions including cloud connected mobile worker applications, high performance data collection hardware, and other technologies to improve worker productivity."
Industrial conglomerates such as Honeywell are often viewed in a negative light due to their sluggish growth nature and high cyclicality. Investors often apply what's known as a "conglomerate discount" to these firms, due to the observation that such companies often operate a vast portfolio of unrelated businesses with few opportunities for synergies.
While Honeywell has chased growth and expanded its portfolio through acquisitions, it has done so in a coordinated manner with a clear vision in mind, and repositioned its portfolio around secular growth trends. It appears that we have entered a new normal period of subdued global economic growth. In weak demand environments, technological advancement and innovation are especially crucial if firms are to boost productivity and growth. It looks like Honeywell is on track.
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