Raytheon-United Technologies Merger
嚜燎aytheon-United Technologies Merger
On June 9th, Raytheon (RTN) and United Technologies (UTX) announced they had entered into an
agreement to combine their operations in an all-stock merger of equals. The new entity would have
around $74B in annual sales within the defense and aerospace industries. Excluded from the combined
company would be Carrier and Otis segments that United Technologies is in the process of separating
into stand-alone companies.
Under the terms of agreement, Raytheon shareowners will receive 2.3348 shares for each share held
and retain 43% of the new company while United Technologies shareowners would retain the remaining
57%. Expected to close in 2Q2020, the timing would coincide with Otis and Carrier separation.
The press release states expectations from both boards of a ※highly complementary technology and
R&D platform§ that is forecast to return $1B-$20B of capital to investors in the first three years while
capturing ※more than§ $1B in annual run-rate cost synergies.
With business overlap estimated to be around 2%, investors have not reflected the same bullish
sentiment in the merger, as reflected by the stock price of each company. Following the announcement,
shares traded lower and have remained below their pre-June 9th prices, underperforming industry peers
and S&P.
The opposition and apathy to this merger is not limited to individual shareholders, activist funds have
expressed their objection as well. While Trump expressed concerns about unfair competitive advantage,
the Department of Defense recently said that they see ※no major concerns§ with the deal.
Third Point Opposition
Headed by Daniel Loeb, the asset management firm and stakeholder in United Technologies sent a letter
to the board of directors outlining 每 and questioning 每 reasons why they are opposed to the merger
with Raytheon.
The letter states that while the rationale behind the proposed merger was seen as being understandable
from Raytheon*s side, United Technologies would have very little to gain in return. Raytheon would gain
competitive advantage in multiple industries including hypersonics and directed energy weapons but
the cyber and data analysis capabilities they would bring could be achieved through supply agreements
or collaborative work with other companies.
Third Point also expressed concern that Raytheon CEO*s comments during the Paris Air Show 每 that his
company would be ※out of business§ within a decade if it were to mirror peers in capital spending 每 was
intended to scare or pressure shareholders into voting for the deal.
As United Technologies is currently breaking up into three companies through Otis and Carrier
separations, Third Point questions the motivation of a merger 每 the point of separating these two units
was to focus on their core business. The sudden decision to look into a merger of this magnitude at a
point where their shares are depressed (from earlier-2019 levels), especially with a near-term outlook
that the 3-way split would be beneficial to the stock*s price is seen as being ※questionable§.
Furthermore, as United Technologies is still integrating Rockwell Collins acquisition, they should keep
focusing on the task at hand, considering management has a poor performance track record as
evidenced by underachieving business segments, including Otis and Carrier. This, Third Point contends,
has led to shares underperforming S&P by 41% over the past five years.
Third Point isn*t the only fund that has voiced opposition to this merger; Bill Ackman*s Pershing Square is
equally against the deal.
The activist shareholder believes this transaction will not only be highly dilutive from share issuance, but
also be negative to their aerospace business. Ackman had supported United Technologies spinoff or
divestiture of non-core segments which were expected to bring about value appreciation to the stock,
an outcome that is likely to be hindered by the Raytheon merger. As such, Pershing Square has said they
would urge shareholders to vote against the deal.
RBC Capital
After hosting analyst meetings with United Technologies CFO, the analyst factually presented the
company*s rationale for the deal. Not surprisingly, the bulk of investors* questions were focused on the
same subject.
United Technologies unwavering reasoning includes the view that the integration process would not be
※intense§ due to minimal direct business overlap. With a large and broad range of technologies the two
companies have, cross-industry transfer in key business segments would benefit as a result.
Hypersonics, for example, would draw on United Technologies expertise on heat management, while
Raytheon*s leadership position in military aircraft cybersecurity would be one of their major
contributions. Within sensors and analytics field where both companies have considerable development
knowledge, there would be an opportunity for ※sizeable synergies§.
As part of a combined entity, United Technologies believes they would be in a better position to
compete against Boeing (BA) and Airbus (EADSY) who continue to expand their verticals further into
avionics. A more diversified company would also be able to weather cyclical downturns better.
Cowen
Based on projected synergies in multiple segments, Cowen*s analyst is bullish on the merger proposal.
Seen from United Technologies* point of view, the benefit would also extend to their heavier debt
burden of $24B, compared to Raytheon*s $2B-$3B.
Regarding the pullback in share price when news of the merger was made public, the analyst thinks that
investors either don*t like the proposal, or have a misunderstanding of the details, failing to see that this
would be a ※win-win situation§ that would provide United Technologies the opportunity to benefit from
synergies, as well as financial flexibility.
Credit Suisse
Following Raytheon*s earnings release, Credit Suisse discussed management input regarding the deal.
Aside from expectations of a ※complementary merger§, they also stated that investor feedback has been
※positive§, which is contrary to sentiment expressed by shareholders. This also is a stark contrast to Bill
Ackman and Dan Loeb*s opinions.
Although Raytheon reported 2Q revenue growth of 7% and raised FY2019 guidance, the analyst brought
up concerns of their long-term prospects attributed to ※slowing DoD budget growth§, and more
pertinently, market share loss of High-Speed Anti-Radiation Missile (HARM) franchise as Northrop
Grumman (NOC) extends its reach into missiles as they expand their verticals. As well, recently merged
L3Harris Technologies (LHX) could pose a competitive threat in defense electronics segment. Despite
what United Technologies could bring into the deal, Credit Suisse does not believe it would improve any
of these issues.
Seaport Global
Briefly mentioned in their bullish United Technologies note after 2Q results, the analyst is nevertheless
※a supporter§ of the merger. Cited were opportunities in hypersonics, drones and associated businesses
within defense sector which has seen increased budget allocations under the current administration.
United Technologies* contribution would be from the aerospace industry though Pratt & Whitney and
737MAX program: current management assumption is 42 aircraft per month for the balance of 2019,
and a ramp thereafter.
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