• Activist investor Elliott Management has a $5 billion-plus stake in industrial conglomerate Honeywell and is pushing the company to break itself up into two businesses.
• Elliott believes that if Honeywell were to separate its Aerospace and Automation businesses, Honeywell shareholders could see 75% upside within two years.
• The activist investor stopped short of overtly criticizing CEO Vimal Kapur.

Activist investor Elliott Management has a $5 billion-plus stake in Honeywell, and it is pushing the industrial conglomerate to break itself up into two companies.

Elliott believes that Honeywell should divide itself along its two primary business lines — Aerospace, which supplies engines and avionics to the military and commercial users, and Automation,  which is a supplier of sensors and control systems to industrial users.

Elliott managing partner Jesse Cohn and partner Marc Steinberg wrote in a Tuesday letter that "the conglomerate structure that once suited Honeywell no longer does." Elliott believes that dividing Honeywell into two companies could unlock upside of as much as 75% over the next two years.

Honeywell CEO Vimal Kapur was appointed to the top job in 2023. He has made no secret of his penchant for M&A, snapping up billions of dollars' worth of businesses in 2024 even amid a broader M&A slump.

In the past, Cohn and Steinberg wrote, Honeywell's carefully assembled businesses had previously driven "consistent" margin improvements. But Honeywell has underperformed its industrial peers since 2019, something which the two attribute directly to a messy corporate structure, a challenged portfolio and shoddy investor messaging.

A Honeywell spokesperson said that the company and its board "acknowledge and appreciate the perspectives of all our shareholders." The spokesperson also noted that Elliott had not been in contact with the company prior to Tuesday's letter but that Honeywell looked forward to engaging with the activist.

Honeywell shares rose as much as 5% in Tuesday trading.

Elliott typically does extensive diligence before debuting its investments, and in this case said it had spoken with "more than 200" former employees and industry experts. But Elliott said it had also hired investment bankers and a consulting firm to advise on its investment.

It is relatively unusual for an activist to work with bankers, who prefer to advise companies rather than dissidents, but it's not unprecedented. Elliott itself engaged UBS in 2017 when it ran a campaign at NXP Semiconductors. It was not clear which investment bank Elliott was working with.

'Straightforward solution'

Cohn and Steinberg noted that Honeywell was home to a "collection of best-in-class businesses," highlighting its Aerospace business as the "crown jewel." But Elliott noted that Honeywell's best days had been under former CEO David Cote, and while the activist investor stopped short of criticizing Kapur, it said Honeywell had "struggled" to meet basic expectations around performance in recent years.

The "straightforward solution" to Honeywell's struggles, Elliott wrote, would be a breakup of the business.

One of the issues Elliott highlighted was a mismatch in how Honeywell allocated its M&A budget. Aerospace, a cash cow for the company, received just 10% of Honeywell's M&A dollars over the last twenty years, Elliott noted.

The two businesses already have their own unit CEOs and largely separated back-office functions, making a split more straightforward than at other companies.

The historical argument for a conglomerate structure was that disparate businesses could save money by centralizing their back-office functions, like legal, IT and HR, in a main corporate function. But Honeywell, with its largely separate teams, does not readily fit that bill.

Conglomerate structure out of favor

Elliott's recommendation reflects a broader trend among industrial businesses. General Electric, arguably the archetypal conglomerate, earlier this year finally completed a plan first announced in 2018 to divide its empire into three parts. Other conglomerates like 3M and Johnson Controls have also sold or spun off businesses.

Elliott's ask at Honeywell is one it has made before. It has built big positions to push for breakups or divestitures in recent years, including a 2019 push at Marathon Petroleum. Other companies targeted by Elliott have also pursued asset sales or breakups. Earlier, it also ran multiple campaigns at steel giant Alcoa to break up the company.

"The path we are suggesting is not novel, and we are confident that many have already suggested it to Honeywell's Board and management," Cohn and Steinberg wrote in the letter.

Gone are the days where investors placed a premium on conglomerates. GE Aerospace and GE Vernova, the power generation business, have all outperformed the S&P 500 this year. That outperformance followed years of undervaluation and decline when GE operated as a conglomerate.

Elliott believes that Honeywell's two main businesses would both be $100 billion companies if they were standalone firms. Some other businesses could likely be disposed of as well, something Kapur has already begun to do, weighing the divestiture of Honeywell's personal protective equipment business and the spinoff of the firm's Advanced Materials business.