CEO-to-CEO call pave way for United Technologies’ mega deal

Bloomberg

When Greg Hayes took the reins at United Technologies Corp in late 2014, the newly minted CEO said he would pursue huge deals to reshape the industrial conglomerate.
He’s been true to his word, though not without a little pressure from activist investors pushing for a transformation. Since late last year, he has completed the acquisition of Rockwell Collins and announced plans to spin off the Otis elevator division and Carrier air-conditioner business as he narrows the focus largely to commercial aviation.
But it was an inbound call in the middle of last year that set him on course for his biggest deal yet. That’s when Thomas Kennedy, Hayes’s counterpart at defense contractor Raytheon Co, phoned to suggest that the companies join forces.
A combination would give rise to an aerospace and defense powerhouse, the executives envisioned, with complementary product lines and fairly little overlap.
“This had been on our radar screen forever,’’ Hayes said on a joint conference call with Kennedy. “So the compelling logic was there.’’

Engines to Missiles
The discussions resulted in one of the industry’s biggest deals ever, forming a manufacturer with about $70 billion in sales and a product lineup ranging from jet engines to missiles, and cockpit electronics to cybersecurity services.
United Technologies shareholders will own 57 percent of the new Raytheon Technologies Corp when the deal closes
next year. The company is expected to be worth well over $100 billion, according to Bloomberg Intelligence.
Investors weren’t enthusiastic. United Technologies fell
3.1 percent to $128.01 at the close in New York, the biggest decline on the Dow Jones Industrial Average. Raytheon climbed less than 1 percent to $187.19.
“While this deal achieves size and diversification, the economic benefits seem modest,” said Robert Spingarn, an analyst at Credit Suisse Group AG.
“We do not see additional scale that will materially deepen existing moats or enhance competitiveness.”
The tie-up, which the companies billed as a merger of equals, will give United Technologies a hedge against the cycles of the aviation markets, Hayes said. That’s important as the company spins off its elevator and climate-controls businesses.

‘More Resilient’
“A leading economic rationale behind the merger was that the resulting company would be far more resilient across business cycles due to its breadth and diversification,’’ said Nicholas Heymann, an analyst with William Blair & Co.
The deal will transform United Technologies from a more limited defense contractor into one of the biggest. About
54 percent of the new entity’s sales will be from defense, the companies said.
“With United Technologies’ plans to spin off its strong cash-generating Otis and Carrier businesses in 2020, and the ongoing cash drain of its new geared-
turbofan engine, the company needed a company with robust cash flow to support efforts to
return cash to shareholders, which it will have in Raytheon,” said Douglas Rothacker, aerospace, defense analyst at Bloomberg Intelligence.
Approval is no sure thing. President Donald Trump said he would be concerned about the combination if there is overlap in the companies’ offerings.
“When I hear they’re merging, does that take away more competition?” Trump said in an interview on CNBC. “It’s hard to negotiate when you have two companies and sometimes only one bid.”
The US Defense Department said its acquisitions chief was evaluating the merger.