Cote joined Honeywell when it was suffering something of an acquisition-spree hangover, having digested 80 M&As undertaken over the past 11 years. “We had to write off a bunch of bad acquisitions that had been done over the previous years, often with big goodwill impairments—stuff [that] wasn’t worth what we paid for it,” he recounts, explaining that he had Anne Madden, who handled Honeywell’s M&A business, analyze 10 years’ worth of deals. “We looked at what had worked and what hadn’t and identified the root causes of [problems] to develop a better process.” The result? In his own words, Cote’s four-step process to M&A success:
Identification: “Knowing what you want to own to support the strategy of the business is very different than saying, ‘Hey, look. That’s for sale. Let’s go take a look.’”
Valuation: “We found that we had a great realization rate on cost synergies but a very poor rate on sales synergies. In our valuation model, we no longer allow any sales synergies to be included. It’s all based on cost synergy, so that I know that no matter how badly we might have missed on something, at the end of the day, I’m still going to make money on the deal. I may not make as much money as I thought, but I’ll make money because I know I can deliver the cost synergies.”
Due Diligence: “We created a single company manual, which did not previously exist, and instructed everyone to follow these steps when doing due diligence. Before we do a deal, I look every one of my functional leaders in the eye to say, ‘Have you looked at this thing and are you okay with it?’ Because I want the lawyer, the finance guy, the HR guy—all of them—to have weighed in and said it makes sense.”
Integration: “I personally conduct the integration reviews pre-acquisition on anything over $50 million. At 30 days, 60 days, 90 days and quarterly, thereafter, for at least a year or longer if I think it’s needed. I go through and ask, ‘Is everything happening the way you said it would?’”
While not officially part of the four-step process, Cote also looks to “Honeywellize” acquired companies early in the integration process. “From Day One, new business cards get ordered, signs change [and] we hold town halls with people to let them know what changes to expect. We can do this, of course, because we’ve already had our integration review. We already know what we’re going to do.
“We’re absolutely rigorous about adhering to this process,” sums up Cote. “That includes me because being paranoid about overpaying is a fundamental part of strategy. We do not allow the word ‘strategic’ to be used in the acquisition discussions—it’s code for, you should be willing to overpay.”