Defense contractors’ deal raises questions
Thomas Kennedy, Raytheon’s CEO, sounded like he was selling his company’s proposed merger with United Technologies not just as good for shareholders but as a patriotic endeavor.
“This is overall a great play for the United States of America, making us a better country, a much stronger country and a country that’s built on noble jobs,” Kennedy said on CNBC on Monday.
The grandiose sales pitch should not come as a surprise.
The deal coincides with pointed questions from many lawmakers and regulators about the economic benefits and costs of large mergers. President Trump, who has opposed some big corporate deals, said he was a “little concerned” that the Raytheon-United Technologies merger could raise the cost of military hardware.
The combined company, to be called Raytheon Technologies, would be a defense and aerospace colossus with annual sales of nearly $75 billion, more than either Lockheed Martin or Airbus. It would combine Raytheon’s missile and radar systems with United Technologies’ jet engines, which are used in commercial and military aircraft, including the F-35 fighter.
However, there are some big questions the companies must contend with as they seek the approval of government officials and shareholders.
Raytheon and United Technologies said the merger would help them slash costs and pass $500 million in savings on to buyers of their products, chiefly the Defense Department.
The companies said the combined firm might be able to save more than $350 million a year just by reducing what they spend on parts and raw materials. But Gregory Sanders, a deputy director at the Center for Strategic and International Studies in Washington, said that technological advances in the defense sector often happen at smaller suppliers to bigger companies.
“That is one of the areas where you worry about innovation,” he said.
The companies’ executives contend that the combined entity would have the scale and financial resources to increase spending on research and development.
Executives said the combined company would return as much as $20 billion to shareholders through dividends and stock buybacks in the three years after the merger is completed.
Before the announcement, United Technologies was in the process of splitting into three companies: an aerospace division, which would merge with Raytheon; Otis, which makes elevators and escalators; and Carrier, which produces heating and cooling equipment.
Raytheon and United Technologies may be positioning themselves for a slowdown or reversal in spending by the U.S. military and commercial airlines. Three times in their announcement, the companies said the merger would help the new firm operate through “the business cycle,” meaning in good times and bad.
Some economists believe that a big increase in mergers and acquisitions can suggest that an expansion may be ending. Companies may be more likely to seek partners when they are struggling to increase profits and sales.
This year, companies have announced mergers and acquisitions totaling $1 trillion, up 14% compared with the same period last year, according to Dealogic.
Deals involving businesses that are closely related to each other can strengthen the combined company’s market power. Raytheon and United Technologies have suggested that the deal would create “highly complementary technology offerings,” something that critics of big mergers consider to be a red flag.
They will most likely need to convince the Pentagon that a merger will not reduce incentives to provide the most advanced and inexpensive technologies. The Defense Department has blocked some previous mergers — including Lockheed Martin’s proposed purchase of Northrop Grumman in the late 1990s — after concluding that the deals threatened competition.