United Technologies and Raytheon create giant through all-stock deal

August 2019 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

August 2019 Issue

Raytheon and United Technologies have agreed to an all-stock merger of equals which will create a $120bn aerospace and defence giant.

The deal is expected to generate more than $1bn in cost synergies by the end of the fourth year, the companies said in a statement. The deal is expected to close in the first half of 2020.

Once completed, it would be the second biggest merger ever in the aerospace sector and would make the combined company the second-largest aerospace and defence contractor in the US, behind Boeing, but ahead of Lockheed Martin, with approximately $74bn in pro forma 2019 sales. Together, the two companies currently employ about 180,000 people worldwide.

Under the terms of the deal, Raytheon shareholders will receive 2.3348 shares in the combined company for each Raytheon share held. United Technologies shareholders will own about 57 percent of the combined business, which will be known as Raytheon Technologies Corporation. Raytheon shareholders will own the remaining stake.

The merger does not include two of United Technologies’ subsidiaries, Otis Elevators and Carrier, which will both be spun off into different companies next year.

“Today is an exciting and transformational day for our companies, and one that brings with it tremendous opportunity for our future success,” said Tom Kennedy, chairman and chief executive of Raytheon. “Raytheon Technologies will continue a legacy of innovation with an expanded aerospace and defence portfolio supported by the world’s most dedicated workforce. With our enhanced capabilities, we will deliver value to our customers by anticipating and addressing their most complex challenges, while delivering significant value to shareowners.”

“The combination of United Technologies and Raytheon will define the future of aerospace and defence,” said Greg Hayes, chairman and chief executive of United Technologies. “Our two companies have iconic brands that share a long history of innovation, customer focus and proven execution. By joining forces, we will have unsurpassed technology and expanded R&D capabilities that will allow us to invest through business cycles and address our customers’ highest priorities. Merging our portfolios will also deliver cost and revenue synergies that will create long-term value for our customers and shareowners.”

The combined company will be led by Mr Hayes, with Mr Kennedy named executive chairman.

The deal has attracted a number of questions and criticism about the economic benefits and costs of large mergers. Both companies are confident that the deal will win regulatory approval, however, as they believe there is no overlap between the two organisations. Indeed, the companies do not compete directly in many markets, and therefore should not spark concern among antitrust regulators.

Activist investors have, however, voiced concern at the prospect of the deal. Pershing Square Capital Management, which owned 5.8 million shares in United Technologies at the end of the first quarter, said in a letter addressed to Mr Hayes that the merger would be ill-advised.

US president Donald Trump also questioned the deal, noting that he was a “little concerned” and that while he would like to see it go through, added: “I want to see that we don’t hurt our competition”.

Following the announcement of the deal, the Defence Department’s Office of Acquisition and Sustainment said it had begun a review of the merger. “Under Secretary Ellen Lord is engaging with industry leadership to understand the implications and governance as a result of this acquisition,” said Lt. Col. Mike Andrews, a Defence Department spokesman.

The proposed deal is the latest in a series of consolidating deals in the defence industry over the last few years. Mergers between General Dynamics and CSRA, L3 Technologies and Harris Corporation and Lockheed-Sikorsky, among others, have changed the landscape of the defence industry.

Richard Summerfield