United Technologies Strikes Deal to Merge With Raytheon
By Cara Lombardo & Doug Cameron WSJ.com
United Technologies Corp. doubled down on the aerospace market with an all-stock deal to merge with defense contractor RaytheonCo. , after UTC executives earlier chose to exit the escalator and air-conditioner businesses.
The combined company, valued at more than $100 billion after planned spinoffs, would be the world’s second-largest aerospace-and-defense company by sales behind Boeing Co. , with annual revenue of about $74 billion this year. It will make everything from engines and seats for jetliners and F-35 jet fighters, to Patriot missile launchers and space suits for astronauts.
The proposed deal intensifies the consolidation in the aerospace-and-defense industry as plane makers seek better terms from suppliers and the Pentagon puts more pressure on contractors to cut costs and invest more of their own money in new technologies, such as space systems and cybersecurity.
The new company will be named Raytheon Technologies Corp., and executives on Sunday called the deal, which doesn’t include a takeover premium, a merger of equals. UTC shareholders will own 57% of the shares and UTC will appoint eight of the 15 new directors. The Wall Street Journal reported Saturday that the two sides were nearing a deal.
UTC’s current leader, Greg Hayes, will serve as CEO of the merged company, with Raytheon CEO Tom Kennedy as executive chairman for two years. Executives said the merger would allow them to boost research spending and squeeze out some $1 billion in annual costs from the marriage.
Raytheon shareholders will receive 2.3348 shares in the new company for every share they currently own. The combined company will have about $26 billion in debt, with $24 billion coming from UTC. It will be based in the Boston area.
The combined entity would be split about 50/50 between commercial and defense sales, though military is likely to shrink as a proportion as UTC’s Pratt & Whitney division ramps up deliveries of its latest jetliner engines. One-third of the two companies’ aerospace and defense revenue last year—some $25 billion—came from the Pentagon.
“There is some truth to the idea that bigger is better,” Jefferies analyst Sheila Kahyaoglu wrote in a note to clients Sunday. “With common customers there is some leverage to size and the supply chain.”
“What’s even more important is the underlying technology both companies are developing,” Mr. Kennedy said in an interview. Raytheon first approached Mr. Hayes about a deal last year, he said.
Mr. Kennedy pointed to areas such as hypersonics—missiles traveling more than five times the speed of sound—and air-traffic-control systems where the enlarged company can be a dominant player.
Byron Callan, a defense analyst at Capital Alpha LLC, said the proposed deal reflected the likely slowing of military spending increases and the need for companies to boost their investment in new technologies.
The tie-up would complete a radical transformation at UTC, a once sprawling conglomerate that already plans to spin off its Otis elevator and Carrier building-systems businesses into separate companies.
Raytheon would be combining with UTC’s remaining aerospace business, and the companies expect the transaction to close in the first half of next year, after UTC completes the spinoffs.
The deal isn’t expected to attract significant antitrust scrutiny, analysts said, because UTC and Raytheon don’t compete against each other in most of their markets.
“It’s a nonissue,” said Mr. Hayes, with expected divestitures of just $80 million a year in sales. However, the companies have yet to brief the Pentagon or suppliers.
On Monday, President Trump said in an interview with CNBC that he is “a little concerned” about the planned merger. “When I hear they’re merging, does that take away more competition?” he said.
UTC makes engines, landing gear and other parts for commercial and military planes. Raytheon produces missiles such as the Tomahawk together with Patriot missile-defense systems, radars and other electronic-warfare systems.
“There is minimal overlap for the two companies,” said Ms. Kahyaoglu. The companies could mutually benefit from their separate expertise, she said, such as leveraging UTC’s expertise in global positioning systems across Raytheon’s missile programs.
The deal is the largest announced so far in a year that has included some big mergers but otherwise has been lackluster. Before this, the biggest proposed acquisition this year was Bristol-Myers Squibb Co.’s $74 billion purchase of rival drugmaker Celgene Corp.
Farmington, Conn.-based UTC, which acquired Rockwell Collins for $23 billion late last year, is one of the U.S.’s last remaining big industrial conglomerates—though it is set to radically transform with the spinoffs and now the merger.
The Otis elevator division and Carrier building-systems businesses will become separate publicly traded companies, leaving UTC as a pure-play aerospace company.
Investors are pressuring traditional conglomerates to become more focused. Rivals Honeywell International Inc. andGeneral Electric Co. are both shaving off units to streamline their businesses. Several activist investors had pushed UTC to split.
Waltham, Mass.-based Raytheon’s sales rose 6.7% last year to $27.1 billion but it has largely avoided big deals. It has invested heavily in recent years ahead of the recent uptick in Pentagon spending, and has the biggest export business among the five largest U.S. defense contractors.
The two-year uptick in Pentagon spending on new aircraft, missiles and other defense equipment is also running out of steam, with analysts projecting muted growth over the next several years.
Pentagon spending fell sharply between 2013 and 2017 because of broader federal budget pressures and then expanded at a clip of around 10% in the final year of the Obama administration budget and the first two of the Trump era. Spending increases are now slowing to low single-digit increases, and much of the additional money is being directed at refreshing U.S. nuclear forces.
A major defense industry merger has the benefits of providing economy of scale, making its supply chain leaner and creating an export powerhouse. But it can also threaten stagnation of research and development and make prices creep up at home, said Gregory Sanders, a deputy director at the Center for Strategic and International Studies, a Washington-based think tank. The merger partners said they’d expand research spending.
“There are a lot of countries that encourage mergers because they’re primarily focused on export markets,” he said. “But from the U.S. perspective that always has to be weighed against the domestic market. Much of what we’re producing is for the U.S. market.”
A market behemoth may be good at selling hardware, but fewer competitors mean that prices across the board can go up, which can be a problem for the main customer: the U.S. taxpayer. Mr. Kennedy said one-half the $1 billion in annual benefits from the merger would accrue to customers, most of it via lower prices for the Pentagon.
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