Managing interest rate risk at Honeywell International Inc. greatly assisted the $38 billion company's intrepid acquisition strategy. In the last five years, Honeywell closed 50 acquisitions with an aggregate purchase price exceeding $7 billion.

The transactions were financed through a combination of free cash flow and higher debt balances, up from roughly $5 billion at year-end 2006 to $8.5 billion this past June 30. By proactively issuing debt when interest rates and liquidity were attractive, Honeywell successfully lowered the weighted average cost of debt by 110 basis points, while reducing the percentage of floating-rate debt by 10 percentage points to 36 percent, thereby reducing its sensitivity to changes in short-term rates.

What did the trick? "Lock in liquidity when interest rates are low and the cost of liquidity is cheap, " says Jim Colby, assistant treasurer. " We take advantage of good opportunities in the market to lock in interest rates at levels to benefit us for years to come. We do it when it's available and we do it proactively. That's our philosophy."

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