Growth & Success eNews No. 48, June 22, 2001

JimPinto.com - Connections for Growth & Success™
No. 48 : June 22, 2001

Business, marketing & futures commentary.
New attitudes, no platitudes.
Stay e-tuned....

Contents:

Invensys in trouble
More about GE abandoning Honeywell
David Bell - Patterns of decline
Dick Morley Advice : Get out of components, or die !
Newsweek : Technology & Health
eFeedback
- Did GE really dump Honeywell?
- Invensys Carm'n'gone. Shuffle goes on
- Freedom of the Internet

Invensys in trouble

Rockwell is in trouble and Honeywell is being abandoned by GE. Another big Industrial Automation leader - Invensys - (the combination of Siebe and BTR and their host of acquisitions) continues to slide downhill. Speculation is rife regarding how long the company will last before it disintegrates.

A recent (6 June 2001) report by Peter Reilly and Mark Cusack of Deutsche Bank, summarizes the situation:

"Full year results from Invensys were in line with the March trading statement. The sharp fall in operating margin and the very poor cash flow were disappointing in absolute terms. Some of the problems are due to the macro environment, but it is hard to avoid the conclusion that the restructuring program has had unanticipated adverse effects on the underlying health of the company. With the shares now 30% above our revised 115p fair value target (previously 105p), we downgrade to Underperform."

Privately, other high-level financial analysts were more caustic:

"We think that things are worse than people recognize. All these restructuring charges make nonsense of reported profits. We hear regular news of turmoil, unusual accounting, poor morale and so on. Another profit warning and a CEO change are expected at some stage."

Another financial analyst:

"There have been so many "exceptional charges" that no-one knows what the real underlying profitability is any more. Cash flow has been horrible and observers are suspicious of the trends. Margins have not improved, despite major workforce reductions. The unreasonable push for year-end profits, reported by managers in all subsidiaries, was a short-term palliative; there will be no more profit to be "squeezed" out in the upcoming quarters. CEO, Allen Yurko, will inevitably exit, and his replacement will inherit a mess!"

Invensys Power Systems had been the focus of much attention due to the planned spin-off (a favorite tactic when the core is declining). The postponement of the planned IPO was no surprise - problems of bookings growth, margin decline and inventory write-offs showed projections that did not favor the spin-off tactic.

No one seems to know or understand whether BTR courted Siebe or vice versa. It seems that the deal was put together in just 10 days with little or no due diligence. Allen Yurko was very keen for the deal to be announced on the same day as Siebe's interim results, as the results were poor and Emerson was considering making a bid (confirmed by a top-level Emerson insider). Without the deal, Siebe shares would have fallen and Siebe would have then have been vulnerable. The merger was indeed an effective poison pill.

There seems to have been a similar story with Baan. The Baan deal was announced on the day that Invensys' poor results were announced. With hindsight both BTR and Siebe had urgent reasons to do a deal that were nothing at all to do with the "compelling industrial logic" which Yurko talked about.

Reports have surfaced that KKR (KOHLBERG KRAVIS ROBERTS & CO. - the heavy-weight acquisition-and-divestiture group) is attempting to buy Invensys with the goal of splitting it up and selling the pieces. Whether they do it (or someone else, like Emerson) this seems the most likely final conclusion.

Invensys axes 3,500 more jobs and warns on profits

Invensys to shelve sale of Power Systems arm

For the Deutsche Bank report, contact
Peter Reilly at:

peter.reilly@db.com
Mark Cusack at:

mark.cusack@db.com

More on : GE dumps Honeywell

My analysis about how and why GE abandoned the Honeywell merger has clearly been justified by reports and events that followed the news last week. GE was having trouble with the European Commission regarding the avionics and aircraft businesses they would need to divest before the merger could be approved. My take was that GE was backing down because their due diligence had shown that Honeywell was not as "clean" as they expected. The rationale: If GE really wanted Honeywell, they could/would continue to negotiate with the EC.

After digesting the news and events over the past weekend, Jeffrey Immelt, the new GE CEO (after Jack Welch departs) felt that he had to confirm the decision. People were saying that Jack Welch really-really wanted this because he had committed himself in public and would lose face if it didn't happen. And, others reported that GE would inevitably come back with further offers, and political clout, to help the EC acquiesce. So, to quell further speculation, Immelt came back with a resounding and emphatic "Zero chance!"

GE Immelt sees "Zero Chance" of Deal going through

The Honeywell Board of Directors came out with a strong statement of support, saying that they would "do everything possible" to make the GE merger go forward. They did this because they recognized that it was the best hope for Honeywell at this time. After Immelt's "zero chance" declaration, recognizing the futility of that direction, Honeywell followed with a statement saying they were indeed looking at their alternatives as a "stand alone" company.

Honeywell Board Pledges Commitment to GE deal

A European observer close to the cacophony, reported:

"Big deals are often done for reasons of weakness rather than strength. Examples: BTR/Siebe, Honeywell/Allied Signal, Daimler Chrysler. Can you name a big industrial deal that has gone well? GE itself does not stand up well to a close scrutiny. I suspect that Jack Welch wanted to do a big deal to muddy the water. 9% of GE's income came from its pension fund; this profit source is going to be small and maybe even negative in 2001. GE was planning to take a $6 b provision for integrating Honeywell - that gives a lot of scope for meeting earnings targets for a couple of years. When they found that the provisions may be more, they had to find a way to exit gracefully."

Pinto Prognostications

The GE/Honeywell merger has a "zero chance" of going forward. Jack Welch will retire with grace - he gets a lot of credit (and forgiveness) for the good things he has done to build GE over the past decades.

United Technologies will come back, with a bid that is lower than their previous one that started this whole affair. TYCO, Emerson and others are calculating whether or not they should probe the possibilities. The Europeans (Schneider and Siemens) will try to pick up the pieces they want, and sell off the pieces they don't understand. The Japanese are watching anxiously, but are too slow to run the race. Honeywell cannot "stand alone" and is looking for anything that makes sense. CEO Michael Bonsignore will inevitably be booted for causing this mess.

Honeywell Third Party Hopes

As we go to ePress on Thursday (21 June 01) night, the two stocks that had been at approximately equal prices before the storm, ended significantly apart. Honeywell stock has been downgraded by several analysts and closed at $36.75, down from the previous week. GE went up to $51.25, indicating support for the "zero chance" result.

David Bell : Patterns of Decline

David Bell, author of the eBook Cannibal Economics insists that the patterns of decline in Industrial Automation - the meltdowns, mergers, low margins, lost direction, etc. are not specific to that business. They're much broader problems that are also surfacing in dozens of other sectors including home construction, home appliances, consumer electronics, telecoms, medical technologies, electrical power generation and distribution, computers etc., etc.

The people in each of these sectors have no experience outside the sector. So, they assume that the problems they're confronting are unique to the sector and don't look outside for solutions. They call it "focus" - but it really is "myopia". Sadly, the solutions will not be found inside the sector.

David Bell exclaims: "Read some history!" He insists that what is needed is vision to see the broader patterns which apply to industrial automation and everything else. Those who look inwardly will simply spin their wheels. Those who see the broader patterns that are emerging will emerge as the winners.

Dick Morley Advice : Get out of Components - or Die!

The PLC inventor, manufacturing guru and technology visionary was keynote speaker at the Toronto, Canada ISA Show, 29 May 2001.

Dick Morley was disturbed by the insular thinking in the instrumentation business : "I didn't see many computers on the show floor here today - no wireless, no remote intelligence, no Blue tooth. I see valves and meters - mostly components, and not many systems. All plants, processes and tools are just peripherals to the computer. If you're in the components business, you're going to die. I tell you now: get out of the components business; make things that hook together and do something!"

As he usually does, in lateral-thinking jumps that keep the audience thinking to keep up, Dick covered a vast range of subjects - from the alteration of social behavior, to mini-factories at the point of consumption, to Chaos-driven systems, to genetic scheduling, to using "breeding" instead of any lines of code - all with practical examples of systems already in use.

Dick's talk, entitled The Bleeding Edge is a delightful extension of his Distorted Realities column in each issue of Manufacturing Automation, says Heather Angus, the editor. According to Morley's industrial intelligence continuum we are right now somewhere between Human Mind/Machine Sweat and Human Mind/Robot Sweat.

Heather Angus' complete report on Dick Morley's speech

Visit Dick Morley at his "Barn" in New Hampshire

Get yourself a copy of Dick Morley's book
The Technology Machine: Manufacturing in the year 2020

Newsweek : Technology & health - what the future means

The most dramatic and profound impact of the technological revolution will be on your health. Sophisticated new imaging techniques, bionic body parts, computerized surgery are enabling doctors to diagnose and treat many diseases more effectively. In the past few years, the wealth of information on the web has given patients unprecedented power over their health-care choices. Where will this lead?

Newsweek (June 25, 2001) looks ahead at innovations in health and medicine. A new self-contained artificial heart provides new hope. The new field of pharmacogenetics uses the discoveries of the Human Genome Project to develop personalized drugs - made-to-order medicines that can be tailored to treat not just generic diseases, but the precise variation of disease suffered by particular individuals. And robotic surgery will soon allow a doctor to operate remotely, across the world.

These astonishing leaps are changing medical understanding and practice in ways that could hardly be imagined. The result for millions: longer, healthier lives.

Read the Newsweek Report on the web

eFeedback

I received a storm of protest regarding my predictions about GE abandoning Honeywell. Last week, a GE-Fanuc insider was somewhat more supportive:

"Off the record - seems like you were right on about GE/Honeywell from the beginning. I actually showed your original prediction to several people in GE-Fanuc management and received a resounding: What does he know?! Good call, Jim!"

Pinto's Point: Interesting how many (including some pretty senior people) are misled by the press. My own simple advantage is the objectivity of non-involvement.

eSpeaking about objectivity from afar, someone from Invensys-Australia (who gets the Invensys weekly NewsFlash) sent me this :

"Now Bruce Henderson is having a turn at running the business. He has published 3 more "newsflash" memos over the past 3 weeks, showing the changes to the changes. One wonders how long he himself will last. It makes coming to work lots of fun!"

Tony Bowker [TonyBowker@aol.com] seems to want the last word on the discussion about the "free Internet" :

"Who cares about folks who believe everything they read on the Internet? I don't want to pay for their training and I'm sure you don't either. No, the Internet and the data it contains is purely "buyer beware" and those who fall for bad data will never learn. So why try?"

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