12 January 2019, WP: Defense mergers and acquisitions poised to keep pace in 2019
https://www.nytimes.com/2019/06/09/business/dealbook/united-technologies-raytheon-deal.html
June 9, 2019
United Technologies and Raytheon to Combine Into Aerospace and Military Giant
By Michael J. de la Merced
United Technologies said on Sunday that it planned to combine its aerospace business [1] with Raytheon, uniting the two into a new manufacturing giant in the worlds of aerospace and military weapons and aircraft.
If this all-stock merger goes through, it would be the latest example of consolidation within the military and aerospace industries, creating a new colossus built to thrive in boom times and weather leaner ones.
Together, the aerospace businesses of Raytheon and United Technologies produce Pratt & Whitney engines, Tomahawk missiles and the F-35 fighter jet. The combined company -- which will be called Raytheon Technologies -- would have about $74 billion in expected sales for 2019.
The combination would become one of the biggest deals of 2019, at a time when the world of mergers has felt some pinch from economic uncertainty and, in the case of some big transactions, greater antitrust scrutiny. As a selling point of their union, both United Technologies and Raytheon played up the fact that neither company has much overlap, hopefully insulating their deal from regulatory blocks.
Consolidation has been a watchword in the military industry [2] for some time, as companies have argued that getting bigger would give them more scale and cost savings that can be poured into research and development, as well as shareholder returns. What had been a proliferation of defense contractors decades ago has sharply fallen to just a handful of companies, including Boeing, Lockheed Martin and Raytheon.
Raytheon makes missiles, radar systems and command and control technology used by militaries around the world. With billions in government contracts, Raytheon is among the companies that stand to gain from President Trump's efforts to increase military spending.
It was also recently granted authorization [3] by the White House to build high-tech bomb parts, used in the company's Paveway smart bombs, in Saudi Arabia.
United Technologies' aerospace business -- whose engines are used in both Airbus commercial jetliners and the F-35 -- has already struck some acquisitions, including buying Rockwell Collins, a maker of airplane parts, for $30 billion.
But both United Technologies and Raytheon say that their businesses share little overlap.
Only about 25 percent of United Technologies' business was defense-related, after the company sold the Sikorsky helicopter business to Lockheed Martin four years ago, Greg Hayes, the chairman and chief executive of United Technologies, said in a joint telephone interview on Sunday night with Tom Kennedy, Raytheon's chairman and chief executive.
"I can't remember the last time we had a major competition against United Technologies," Mr. Kennedy said.
Mr. Hayes said he did not see "any issue" with antitrust reviews by the Justice Department. And he added that he did not believe there was any need for the Raytheon deal to gain antitrust approval from China, after Chinese regulators held up United Technologies' takeover of Rockwell Collins by several weeks.
Still, when asked about the merger on Monday, Mr. Trump said he was "a little concerned" about the deal's potential to eliminate competition in the defense sector.
"It's hard to negotiate when you have two companies and sometimes you get one bid," he said during an interview on CNBC. [4] "The United States has to buy things, does that make it less competitive?"
As much as the companies stand to benefit from sharing technologies and costs in good times, there is also the sense that the deal could help if the aerospace and military businesses suffer slowdowns as well.
Some analysts have predicted that American military spending will tail off in the near future, after an initial burst at the beginning of the Trump administration. And last week, the International Air Transport Association, a global airline trade group, cut its forecast [5] for the industry's profits this year as air traffic slows.
Yet Mr. Hayes argued that Raytheon Technologies would have a bright future, with growth in both of its sectors. "There's nothing defensive about this," he said. "This is an offensive deal."
The transaction announced on Sunday was born from a different kind of deal activity at United Technologies: The conglomerate announced in November that it planned to split itself into three smaller, publicly traded companies. One would be its aerospace business; the second would be Otis, the maker of elevators and escalators; and the third would be Carrier, a big producer of heating and cooling equipment.
Such a move, meant to create businesses with greater focus, has followed a trend of industrial empires slimming themselves down to placate shareholders. Other conglomerates, like General Electric, have made similar moves to shed noncore operations.
Yet separating United Technologies' aerospace business made it an attractive merger partner for Raytheon, because the two would be of similar market capitalization and could benefit from sharing technologies. Mr. Kennedy, who had entertained the idea of doing a deal for some time, called Mr. Hayes and broached the idea of a merger. By December, the two companies began discussing making it happen.
Raytheon is worth roughly $52 billion, and United Technologies has a market cap of $114 billion, before it splits into three.
In the past 30 years, the defense industry in the United States has steadily shrunk, winnowing from about five dozen or so companies to a handful of major contractors.
Some military officials have been loath to see any more consolidation in the industry, and have indicated they would seek to block mergers involving the biggest five players.
Even so, increased pressure to reduce costs has been driving consolidation, analysts said. The Pentagon, for example, has pushed suppliers to focus on cost cutting.
A merger, especially at this scale, could help Raytheon save money throughout its supply chain, analysts said. It could also bolster the contractor's business in exports.
Under the terms of the all-stock merger, shareholders of each company would receive stock in the newly combined company. United Technologies shareholders would own about 57 percent of the combined business.
Mr. Hayes would become chief executive of the new company, while Mr. Kennedy would become executive chairman. Mr. Hayes is expected to assume the chairman role as well two years after the deal closes.
The combined company's board would comprise eight existing United Technologies' directors and seven from Raytheon.
The merger is expected to be completed around the same time that United Technologies spins out the Carrier and Otis businesses.
[2] https://www.washingtonpost.com/business/2019/01/12/defense-mergers-acquisitions-poised-keep-pace/
[3] https://www.nytimes.com/2019/05/24/world/middleeast/trump-troop-increase-middle-east-iran.html