Uneasiness remains in Intermec deal

The lack of an obvious remedy to possible Federal Trade Commission concerns has contributed to the widening spread in recent weeks on shares of Intermec Inc., which Honeywell International Inc. announced plans to buy for $10 a share on Dec. 10.

Since reaching a high of $9.92 on Feb. 13, the shares had dropped to as low as $9.77 on Monday, April 22. They did, however, rally somewhat Tuesday, opening at $9.80 and climbing as high as $9.85 through afternoon trading.

The FTC issued a second request on the $600 million deal on March 11.

Both companies are leaders in the auto identification and data capture, or AIDC, business, which includes scanners, printers and labelers used to track commercial inventories and shipments.

But the focus of the FTC's investigation is believed to be competition for "rugged" handheld devices used in industrial, retail and healthcare settings. Honeywell and Intermec are among the top three competitors in the rugged sector, with Motorola Solutions Inc. being the market leader.

The sector has been consolidating rapidly because of slowing growth and new competition from smartphones. Motorola holds 43% of the rugged handheld market. A combined Honeywell, with 12%, and Intermec, with 11%, would hold 23% of the market. The next closest competitor, Datalogic SpA, holds less than 5%. The Pidion line made by South Korea's Bluebird Soft Inc. also has a small position and there are a number of other fringe competitors.

The FTC is believed to be concerned Datalogic's market share makes it a poor candidate to be considered a true No. 3 player in the market.

Intermec has suffered the most from the flight of some customers to cellphones and has suffered declining market share recently but there is doubt that the FTC will take that as sufficient reason to let the deal go through unscathed. Already the market has only two weak competitors to offset the market power of the top two players and the merger would drop that number to one.

"The merger could cut the competition from a weak four-player market to a weak three," said one arbitrageur tracking the deal.

The obvious remedy would be to require Honeywell to spin off Intermec's rugged line but such a move would eliminate the value of the deal to Honeywell.

There is also some talk that the FTC is concerned about Honeywell gaining control of some of Intermec's patents, which Intermec has aggressively licensed to other radio frequency identification manufacturers in the past decade. That concern could be addressed by requiring Honeywell to maintain Intermec's licensing agreements.

Patent portfolios of merging parties have gotten scrutiny from antitrust regulators of late, particularly if they contain standard-essential patents or have otherwise become critical to the operation of devices produced by a variety of manufacturers in an industry.

The business has consolidated from seven major wireless terminal manufacturers in the early 1990s to the three major providers today. Intermec is the lone surviving independent company. Most recently, Motorola acquired Psion plc in 2012 and Honeywell acquired EMS Technologies Inc. and its AIDC subsidiary LXE Inc. in 2011.

On March 18, Honeywell withdrew its antitrust application to the European Commission for the Intermec deal. The company didn't give a reason, but it is likely it was seeking to resolve the U.S. antitrust worries first in hopes of avoiding an extended review in Europe.