DHR Danaher Corporation

   (FROM THE WALL STREET JOURNAL 9/2/15) 
   By Ted Mann 

When Honeywell International Inc. was thinking of buying a maker of hand and foot protection in 2008, one of its executives toured a Charleston, S.C., factory owned by the target and was shocked.

Bales of raw Malaysian rubber and industrial solvents and dyes were scattered around the ramshackle plant. The huge vats where rubber gloves for utility workers were repeatedly dipped until thick enough to resist 40,000 volts of electricity were badly aged. The executive called the office and delivered a frank report: This doesn't look anything like what Honeywell does.

Chief Executive Dave Cote gave the green light to buy the company, for $1.2 billion, anyway. Honeywell poured in investment, cutting the lead time for making one of the painstakingly hand-dipped rubber gloves from a year to 30 days while reducing waste.

Now Honeywell, best known for building sophisticated products like 3-D weather radar and aircraft guidance systems, is also in the business of manufacturing gloves and boots.

Activist investors in companies have made "conglomerate" a dirty word. Across corporate America, the pressure is on to split up and concentrate on the most promising lines of business. Yet even as rival General Electric Co. dismantles its sprawling financial operations and smaller companies like Danaher Corp. and Johnson Controls Inc. break up, a select group that includes Honeywell has bucked the trend toward a sharper focus and drawn cheers from investors for diversified lineups.

Honeywell has done 84 acquisitions in the 13 years under Mr. Cote, adding about $12 billion in annual sales and ending up with a stable of about 65 different brands. The company in late July announced a $5.1 billion deal for Elster Group, a maker of gas, water and electricity meters -- the largest acquisition of Mr. Cote's tenure.

The result is an array of loosely related offerings, from satellite-based Wi-Fi systems for corporate jets to antistatic "finger cots," small, rubber finger sheaths used in the assembly of sensitive electronics and computer chips. The company still makes the Honeywell thermostats that have dotted the walls of American homes for generations and which gave the corporation its name. Now, the same entity boasts "optimal earmuff attenuation" in its hearing protection gear for industrial workers, while also producing a range of chemical agents and industrial components for refining oil and natural gas.

So far, investors approve of the corporate sprawl. The company's shares Tuesday closed at $95.96, up from $32.65 on the day Mr. Cote took over in 2002. That 194% gain is more than twice the increase booked by the S&P 500 over the same period.

The question is whether Honeywell can keep the act going. Small, disciplined deals for boot makers are no longer enough to make a meaningful difference in growth at a company with $40 billion in revenue last year. Investors now want Honeywell to make bigger deals while keeping risk in check. They worry about the availability of suitable targets.

Conversely, analysts from Deutsche Bank warned in April that investors' patience for Honeywell's diverse business lines could grow short now that peers like GE, under shareholder pressure, are making dramatic adjustments to their portfolios.

"Companies aren't born with a right to be a conglomerate," said Steve Winoker, an analyst at Bernstein Research, who briefly worked for Honeywell as a vice president of global strategy from 2006 to 2007. "That's a right only earned over time. And until you earn it, the presumption should be you can't do it."

Run well, a conglomerate can make acquired businesses more valuable by improving management, introducing them to new customers and expanding overseas. The diversity then reduces the parent company's exposure to any one risk or market.

But peers have long faced pressure to reduce complexity and focus on fundamentals. GE, for example, is attempting to sell its slow-growing appliance business, and is shedding its profitable financial-services arm.

United Technologies Corp., which has a broad range of businesses from jet engines to air handlers to food-service equipment, announced in July it would sell its Sikorsky helicopter unit to Lockheed Martin Corp. for $9 billion.

Danaher, which has acquired more than 400 companies since 1984, especially in science and medical technology, announced plans in May to acquire filtration and fluid management company Pall Inc. and then split the conglomerate into two separate companies, one focused on life-science and diagnostics equipment and the other on measuring instruments and automation.

"Both companies will be able to accelerate revenue and earnings growth as smaller, more focused, independent businesses," Danaher Chief Executive Thomas Joyce told investors on a conference call when the decision was announced.

Johnson Controls, another multi-industry company, recently announced it would jettison its business making automotive seats and interiors, to focus on two remaining units that make building control panels and sensors and battery systems. The company told investors that the automotive unit would better be able to invest in new product lines if it was disconnected from the other businesses.

Honeywell, however, said it remains comfortable with its breadth. Mr. Cote bristled in an interview that industrial companies like his are more likely to be questioned about the diversity of their business lines than firms in other sectors. Google, for instance, has expanded from Internet searches into contact lenses, self-driving cars and even robots but seems to get a pass from investors.

But Honeywell is different from both Google, which recently announced it would separate its core Internet business from more experimental ventures, and traditional holding companies such as Berkshire Hathaway.

Google's new structure is intended in part to prevent its diverse interests from overwhelming the company's main engine of profit. While at Berkshire, its various companies operate in relative autonomy.

Honeywell maintains the structure of a diversified conglomerate, where three strategic business units rise and fall in their respective markets, and can help boost one another in hard times. The three sectors -- aerospace, automation and control systems, and performance materials -- rely on the headquarters for traditional functions, like corporate finance and research and development. The company says it also uses shared distribution and sales networks to boost sales and generate efficiency across its different product lines.

Mr. Cote said the real risk isn't in having a diversified business, but in getting caught up in "fad-surfing" -- trying to find new markets or business lines that don't fit a company's strengths or come at too high a cost.

"I've always thought that was a great way to lose a lot of money," Mr. Cote said.

A decade and a half ago, Honeywell botched a merger with AlliedSignal, leaving rifts in the management of the company that hampered cooperation and hurt morale. It left a mess that employees nicknamed "Honey Hell." The wounded company was then almost taken over by GE, but when European regulators shot down the acquisition, it was left with bleak prospects.

Upon arrival at Honeywell, Mr. Cote turned his attention to integrating factions within the company and cutting waste. He learned how to do that in the finance department at GE, where he was a point person on the integration of RCA after CEO Jack Welch jumped into the broadcasting business in the early 1980s.

As Honeywell's new CEO -- previous CEO Lawrence A. Bossidy had retired -- Mr. Cote instituted an aggressive but straightforward acquisition strategy. The company would look for midsize deals in business lines close to the ones in which it already operated, ideally in fragmented, tightly regulated, even mundane markets where Honeywell could instantly become a heavyweight. The philosophy, Mr. Cote has said, is to have a great position in good markets.

At the end of the last decade, that logic led to gloves and boots. The New Jersey-based company expanded from its business selling fire alarms and security systems into worker safety by buying a company that had a technology for sniffing out gas leaks.

From there, Honeywell leapt into personal safety, beginning with the 2008 deal for Norcross Safety Products LLC, which owned Salisbury, the dilapidated maker of safety gloves for utility workers. Norcross's properties also included various lines of heavy duty rubber boots for firefighters, utility workers and fishermen. One line popular with fishermen, Xtratuf, once made a high-heeled pair for Miss Alaska. Another line, Muck Boots, is popular with hunters and outdoorsmen.

"We own Muck boots?" Mr. Cote said on a postdeal conference call with his deals team, after learning the brand was one of those Honeywell planned to dump. He ordered the group to keep Muck and figure out a way to make it grow, he said.

Fixing Norcross didn't come without headaches. One of the company's two boot plants in Rock Island, Ill., lacked basic safety equipment -- a person familiar with the matter called it a disaster.

Honeywell closed the Illinois facility and spent millions building a new factory in China, but poor workmanship there caused the famously watertight boots to leak. Xtratuf devotee Mark Begich, then a U.S. senator from Alaska, sent Mr. Cote an open letter of protest about the move to China and the decline in quality. (The other Rock Island factory, which makes Servus boots, remains in operation.)

Honeywell blamed the problems on poor worker training, which it said it amended. It also said it increased inspections and expanded testing. The aerospace and thermostat conglomerate now commands rack space in the footwear aisle at sporting-goods retailer Cabela's -- despite some persistent negative reviews online -- and has branched out into camp shoes and gardening clogs.

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