United Technologies Corporation is a U.S. multinational conglomerate that currently manufactures a wide range of products including those for military contracts from which it derives 10% of the company’s annual income.

The company’s leaders have determined that their wise course for the future is to double down on the aerospace market and make a merger deal with Raytheon, an aerospace company, to merge the two entities in an all-stock arrangement.  As a part of that deal, UTC has determined that they will sell off their escalator and air-coditioner businesses.  After the planned spin-offs, the combined company will be valued at $100 billion, making it the second largest aerospace and defense contractor, by sales, with an annual revenue of about $74 billion (ref WSJ).  The new company is anticipated to make a range of products, focused on the aerospace industry.  The proposed merger highlights the continued consolidation in the aerospace and defense industry and responds to the need for acquiring better terms from suppliers as well as offering better deals to the military as a result of internal cost cutting,  The Pentagon is also pressuring contractors to invest more of their own money in new technologies such as space systems and cybersecurity (ref yesterday’s post).  The new company will be named Raytheon Technologies Corporation and the deal is being called a “merger of equals.”  But, not quite:  UTC shareholders will own 57% of the shares and the company will appoint 8 of the 15 new directors.  As well, UTC’s current CEO, Greg Hayes, will head the new company and Raytheon’s CEO, Tom Kennedy, will serve as Executive Chairman of the board for 2 years.  The combined company will have $26 billion in debt, with $24 billion of that coming from UTC.  One can see why UTC would think this a terrific deal.  One-third of the two companies’ aerospace and defense revenue last year came as a result of the efforts of Raytheon.  Kennedy reports that “bigger can sometimes be better . . . but even more importantly is the underlying technology that both companies are developing” pointing to hypersonics and air-traffic control systems where the aligned company can be a dominant player.  Raytheon approached UTC about a possible deal.  And, once UTC has completed its transformation and divested itself of some of its current businesses, the deal will center on UTC’s remaining aerospace industry with that of Raytheon’s.  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.  Analysts have noted that there is “minimal overlap for the two companies.”  A major defense industry merger offers the benefits of providing economy of scale, making its supply chain leaner and creating an export powerhouse.  But, if the merger is not handled well, it could also cause stagnation of research and development, something that Raytheon has excelled at.

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