Former Chairman & Chief Executive Officer, Honeywell
Dave Cote and Vertiv CEO Rob Johnson on GS Acquisition Holdings merger
Vertiv Holdings will become a publicly traded company through a merger with GS Acquisition Holdings. Former Honeywell CEO Dave Cote, who helped put the deal together, and Vertiv CEO Rob Johnson join "Squawk on the Street" to discuss.
About David Cote
David Cote, former chairman and CEO of Honeywell, appeared on the podcast "Action Catalyst" in September 2022 to discuss his book "Winning Now, Winning Later." During the interview, Cote described his approach to balancing short-term performance with long-term investment, stating that while he could grow earnings at 14 percent, he chose to grow them at 10 percent in order to reinvest the difference into initiatives such as globalization, new products, and process improvements. He also noted that telling investors or a boss that performance will be poor for three years before improving is typically not well received, as they may seek alternatives in the meantime. Cote also discussed the importance of reliable accounting systems, saying that accounting was Honeywell's primary information system and that unreliable data would lead to poor decisions about profitability. He reflected on his tenure at Honeywell, where he grew the company's market capitalization from approximately $20 billion to nearly $120 billion, and he encouraged listeners to connect with him on LinkedIn.
Transcript (22 segments)
✨ AI-enhanced transcript with speaker attribution
I
Interviewer0:00
A friend of all shows on CNBC, former Honeywell CEO Dave Cote. He's working with Goldman Sachs, announcing today that it's buying a major developer of data center equipment, obviously one of the hottest secular growth stories out there right now. It's part of this pack which is called GES Acquisition Holdings. And by the way, Dave Cote joins us now first on CNBC, along with Vertiv CEO Rob Johnson. Rob, I don't mean to slight you, but I do want to talk to your executive chairman first. Dave, why are you back in the game when everyone said, you know what, he's enjoying retirement?
D
David Cote0:30
Why? I'm enjoying retirement, but I like working. That's kind of like you guys. Business is fun. It's this never-ending game you get to play. It's competition. It's just fun, so I like it. And I don't think we could have found a better opportunity here with Vertiv.
I
Interviewer0:50
I remember when you took over Honeywell, it was in a bit of shambles. You changed it. Your TSR was rather remarkable. Thank you. Where is this company, which is again in like aerospace and great secular increase, where is it versus when you took over Honeywell? Actually, you couldn't frame it any better.
D
David Cote1:10
I like the secular trends behind this for a couple of reasons. Data is going to continue to explode. In fact, you could almost call it freakish growth in terms of its ability to grow 20% a year. That data has to reside somewhere, and that's where we play. The other second piece of this is the need to eliminate latency. People don't want to wait for information to get to them. It's not always going to be able to go to a data center in Iceland or the Arctic somewhere. It's going to have to be closer by, getting things closer to them so that you have like these 10 by 10 data centers instead of 20,000 square-foot data centers. It's going to be important, and that's a place we're going to excel.
I
Interviewer1:52
So we're talking about a splintering in the number of potential customers, I assume.
D
David Cote1:55
Absolutely. Yeah, if you look at our customer base, a lot of people think it's just hyperscale and colocation is leading the market, but really it's the edge devices, latency-driven applications, things like Netflix, Hulu, things like security. Those types of things are going to really drive a proliferation of a lot of many small data centers all over the place.
I
Interviewer2:14
What kind of numbers could we be looking at relative to what we have now?
D
David Cote2:17
So we're talking, you know, when you just think about cell towers or something, and in the millions, you're talking about that kind of number of small data centers around you. Each cell tower would be a mini data center, if you will, with storage and power processing power at the base.
I
Interviewer2:31
David, is this just a growth opportunity or one where you see the ability to continue to take out costs? You're known for doing that in the past, but this is a private equity asset. One would expect Platinum, which alone owns 38%, has done that through the years. Is there still an opportunity there for you to actually take cost out?
D
David Cote2:48
I like this for a number of reasons. And if you take a look at Honeywell, it wasn't just cost play. We more than doubled sales while we were there. So something happened. Why do I like this? Same reasons I liked Honeywell: great position in a good industry, differentiation with technology, the ability for organic sales growth especially driven with innovation and new products, the ability for inorganic sales growth. And as you know, we made a lot of money at Honeywell. And margin expansion. We estimate we're 500 basis points behind where our peers are. Same situation we had at Honeywell, same opportunity here. And the way I've described it is we're about where Honeywell was at the two to three year point. So the Platinum folks, along with hiring Rob, did a great job establishing the foundation that's necessary to be able to change the trajectory of this business. And if you look at sales growth, organic sales growth has been more in the 5% range over these last few years, and that's what we're going to be doing next year also. This is going to be both growth and margin.
I
Interviewer3:53
And you're going to still be able to get margin out, obviously. I'm sorry, if you still think you're going to get margin out or increase margin?
D
David Cote3:59
Oh, absolutely. And you think about the number of times at Honeywell I said, 'Gross sales hole, fixed cost constant.' It's a simple concept, works like a charm when you've got contribution margins of 45%. It works like a charm. And we're already embarking on that. Rob's taking the lead on making that happen.
I
Interviewer4:16
Rob, why was this the way that Platinum was better off going, as opposed to just taking this thing public?
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Rob Johnson4:21
Yeah, so it'd be a couple years from now that we'd be able to take it public. What works for us here is a couple things. First of all, we get to work with a rock star like Dave, who's a mile wide and a mile deep in what he can do and help us. And I really mean that. I've had six months with him so far. But the opportunity to deliver now, there's inorganic opportunities that we just can't go after today because of that. And the biggest thing for our employees and our customers is to experience now the certainty of where we're going to end up. When you're in private equity, you never know who's going to buy you next, where you're going to be. Now we all know where we're going. We're going to have the dollars to do the innovation, do the inorganic activities, and it makes a lot of uncertainty go away for us.
I
Interviewer4:59
Yep, no, it wouldn't. I want to be sure people recognize this is the beginning, not the end. Maybe this company is going to look two, three years from now. I like a mosaic, and to just look at it just as a data play, as good as it is, is wrong. There's a bigger vision.
D
David Cote5:15
Yeah, absolutely. And you said it absolutely right. And you think back, similar to what we did at Honeywell, we started with a certain core. As you recall, we dismantled much of that core and then we added a lot to it. So that we did something like $23.5 billion in sales transactions on a company that started at $22 billion. Huge amount of change, yet earnings went from like a buck fifty to over eight bucks this year. The same kind of possibility exists here when you look at the size of the market, how fragmented it is. If you take a look at the top three or four players, they usually account for less than 50% of the industry. A huge amount of fragmentation, which means organic growth and inorganic growth. And as Rob pointed out, we now have the balance sheet to do something with this. So if it comes across that I'm pretty pumped up about this, it's because I am.
I
Interviewer6:08
I do think it's important to point out that you've always been a globalist in sense of where things are. Yeah, so many people feel if there's no China deal, a big international company can't do well. Obviously that is not the concern here.
D
David Cote6:22
Yeah, actually I think it works to our advantage either way. And Rob can explain a bit more about how we've positioned the company. But similar to Honeywell, we tend to produce in the region where we're selling. And this was a fundamental of how we ran Honeywell. Darius is doing the same thing with it, and it just puts you in a much better position overall. And Rob's done the same thing with Vertiv.
R
Rob Johnson6:45
Yeah, we actually manufacture in country for our country. Although there's a little bit of effect, but the China deal overall, we're in a really good position compared to our competitors, mainly Asia-based manufacturers.
I
Interviewer6:56
That's some well. Gentlemen, want to wish you the best of luck. Dave, welcome back, not that you ever left. Rob, I know you've been in this industry, you've been born in this industry. Congratulations.
D
David Cote7:04
Thank you.
R
Rob Johnson7:05
Thank you very much.