United Technologies and Raytheon have agreed to merge, the companies said Sunday afternoon, crafting an all-stock deal that would create a giant evenly balanced between civil aerospace and defense that may be better positioned to handle cost pressures and uncertain prospects in both sectors.
The two New England-based industrial stalwarts billed it as a “merger of equals,” but United Technologies investors would control 57% of the company, which will be called Raytheon Technologies, they said in a statement.
The combined company would have almost $80 billion in annual sales in 2020, which should push it past Airbus to be the second-largest aerospace and defense player after Boeing. The aggressive move, which was first reported by the Wall Street Journal Saturday evening, comes as a surprise, industry watchers told Forbes, with United Technologies already in the midst of a transformation: In November it completed a $30 billion acquisition of the aviation components supplier Rockwell Collins, and it was preparing to spin off its Otis elevators and Carrier climate controls units to become an aerospace and defense pure play.
“Everybody knew [CEO] Greg Hayes was reorganizing United Technologies to focus on aerospace and defense, but nobody anticipated a combination of this scale,” says Loren Thompson, a defense analyst and industry consultant with the Lexington Institute.
If the merger is approved by shareholders, it is expected to close in the second half of 2020 after United Technologies completes the spinoffs, which it had said would leave behind an aerospace company with $50 billion in annual revenue, roughly 75% on the commercial side, where its products run the gamut from avionics and aircraft interiors to jet engines, and 25% from defense, where its Pratt & Whitney unit has a dominant military engine franchise, making the powerplant for the F-35.
The Farmington, Conn.-based company’s product line has little overlap with defense stalwart Raytheon, which booked $27 billion in sales last year. Raytheon is the largest producer of missiles in the world, as well as missile defense systems like the Patriot. It also makes radars; sensors for warplanes, submarines and satellites; and electronic warfare and cybersecurity systems.
U.S. defense contractors have mostly opted to be pure-play businesses, and while defense spending has climbed sharply over the past two years, and is set to rise again in the next budget, it’s still below the heights reached during the George W. Bush administration, adjusted for inflation. Meanwhile their diversified competitor Boeing has ridden a 5% annual expansion in commercial air travel over the past 20 years to become the world’s dominant aerospace company.
Some observers say it’s the fat profits Boeing’s earning in commercial aerospace that enabled it to bid aggressively on price to win a recent string of big Pentagon defense contracts: the Air Force T-X trainer, the MQ-25 drone and the MH-139 helicopter.
The budget outlook is another reason why hedging on defense might be a good move for Raytheon. CEO Thomas Kennedy has expressed optimism that the new focus in U.S. defense strategy on countering the threats posed by China and Russia play to the Waltham, Mass.-based company’s strengths, but with federal debt continuing to rise in proportion to the overall economy, Democrats in control of the House and the automatic defense spending cuts known as sequestration looming, the prospects for continued increases in military spending are in doubt. And when belts tighten it’s the weapons procurement budget that gets cut first, not personnel costs.