United Technologies, Raytheon plan merger to create defence, aerospace giant

Darnell Taylor
June 11, 2019

On Sunday, Raytheon and United Technologies announced they agreed to merge the defence company with United Technologies' aerospace business.

"I think once [President Trump] understands the benefits of this merger in terms of what it's going to do to reduce costs to the government, what it's going to do to improve the technology of the US government and our defense profile, and what it's going to do for jobs in this country, I think he's going to be supportive, as he has been for both companies over the course of this administration", United Technologies Chairman and CEO Greg Hayes told CNBC soon after the president called in.

The US defense industry has been dominated for the past two decades by five contractors - Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon.

"I want to see that we don't hurt our competition", he said in an interview with CNBC.

Both companies' shares stand to benefit because of the potential synergies, which could free up capital that may be deployed, Jefferies wrote in a note. United Technologies has a current market value of $114 billion while Raytheon's is about $52 billion.

"UTX also gets to de-lever with Raytheon's balance sheet and Raytheon holders get compensated in return".

United Technologies shareholders would own 57 percent of the combined company, with Raytheon shareholders owning the rest.

Eventually, the companies expect the merger will cut $1 billion in costs annually, half of which will be returned to customers.

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A United Technologies-Raytheon merger has always been speculated on by analysts and investors as the two companies operate mainly in different segments, meaning a deal is likely to attract less scrutiny from regulators than other mergers between big defense players.

UTC and Raytheon do not compete directly in many markets and the deal may not attract significant scrutiny.

According to an in-depth investigation by In These Times published last month, Raytheon is one of the major providers of missiles and other weaponry to Saudi Arabia, which-with the backing of the United States-has been waging a vicious assault on Yemen since 2015.

Analysts say a merger of UTC, whose divisions include the aero-engine maker Pratt & Whitney, and Raytheon, maker of the Tomahawk and the Patriot missile systems, would be likely to re-shape the defence sector as other firms look to consolidate.

UTX and RTN have followed in the footstep of Harris (HRS) and L3 Technologies (LLL), which a year ago announced an all-stock merger.

"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, Raytheon Chairman and CEO.

Top-line growth for United Technologies' remaining segments has been strong, but costs have been outpacing revenues, and gross margins are diminishing. Another crucial customer is the U.S. Department of Defense.

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