UTC and Raytheon eye $1B in savings by combining
With the stunning revelation of the planned combination of United Technologies and Raytheon, the conglomerates long associated respectively with Connecticut and Massachusetts would become a New England powerhouse that ranks among the three biggest aerospace and defense manufacturers in the world.
On Sunday evening, United Technologies and Raytheon confirmed they had reached a merger agreement valued at more than $100 billion, sending shares of UTC up 5 percent in the overnight hours to $138, only for the stock to fade to $128.01 after at the close of trading Monday. Raytheon shares were up slightly to nearly $187.19 on the day.
UTC would contribute its Pratt & Whitney aircraft engine and Collins Aerospace units to the new Raytheon Technologies, combining with Raytheon’s array of historic businesses including units focused on sensors, electronic warfare and precision weaponry such as missiles. The companies aim to complete the merger by the spring of 2020, with UTC CEO Greg Hayes to to lead the Raytheon Technologies as CEO, and Raytheon CEO Tom Kennedy serving two years as executive chairman before handing board leadership to Hayes.
Kennedy indicated on a Monday morning conference call the companies had alerted officials at the U.S. Department of Defense about the discussions between the boards of directors that date back to a year ago.
“I called Greg probably in early summer last year,” Kennedy said during a Monday morning conference call. “He did recognize that if we could make something like this happen, how tremendous it would be. ... To be able to have the right technology base is important.”
The companies anticipate gleaning more than $1 billion in cost savings within four years by operating as a single entity — half of that related to eliminating overlapping facilities and capabilities — with no immediate estimate of an impact on jobs. On Monday, Hayes described as part of the “DNA” of UTC the company’s ability to wring extraneous costs from its operations, but emphasized the companies intend to grow over the long term.
“We know how to do this,” Hayes said. “We are not looking to consolidate a lot of factories, we are not taking out a lot of jobs. In fact, we are going to add a lot of jobs as a result of this merger.”
UTC entered 2019 with a workforce of 240,000 people, with Raytheon employing 67,000. UTC has hired more than 5,500 people this year, according to Hayes, with state Sen. Matt Lesser, D-Middletown, telling Hearst Connecticut Media on Monday that the company has been hiring in his district that includes a major Pratt & Whitney plant.
On Sunday, Gov. Ned Lamont indicated about 100 headquarters staff of UTC would move to a head office in the Boston area where Raytheon is based today in Waltham, with UTC employing about 19,000 people in Connecticut. On Monday morning, Hayes told investment analysts that Raytheon Technologies is committed to maintaining its Connecticut operations going forward, including some corporate functions.
U.S. Sen. Richard Blumenthal, who sits on the Senate Armed Services Committee, called the headquarters move one of several factors to make the proposed merger “potentially unwelcome” as quoted in a Sunday statement to media outlets, saying he would press for the new Raytheon Technologies to recommit to adding jobs in Connecticut as it hires to meet future contractual needs.
“This huge potential merger raises very sweeping and serious questions and doubts about its impact on the Connecticut workforce and economy, as well as our national security and defense,” Blumenthal said Sunday evening in written comments. “I am troubled by the possible impact on cost and competition of defense product, which may significantly affect American taxpayers. ... This entire deal merits aggressive and penetrating scrutiny by Congress — as well as the Pentagon, the Department of Justice, and other executive branch agencies.”
The deal marks the culmination of a massive transformation of UTC under Hayes, who was promoted from chief financial officer in November 2014. He replaced Louis Chenevert, whose six-year tenure was capped by the 2011 acquisition of Goodrich, a deal that extended UTC’s Connecticut reach to Danbury where it inherited a Goodrich development lab for sensors and optical technologies on military aircraft and satellites.
In the years since, Hayes has put UTC through a radical restructuring to focus on aerospace platforms that offer the highest profit potential, beginning with the 2015 sale of the Stratford-based helicopter manufacturer Sikorsky Aircraft to Lockheed Martin for $9 billion.
This past November, UTC acquired Rockwell Collins for $30 billion, adding systems that control aircraft in flight, while disclosing its intent to spin off as independent companies Otis Elevator and its UTC Climate, Controls & Security division that includes Carrier. Under Chenevert’s predecessors George David and Harry Gray, UTC had regarded its tandem building and aerospace businesses as helping offset downturns in either industry.
About half of UTC’s historic annual revenue was generated by those building technology spinoffs, prior to the Rockwell Collins addition. UTC’s aerospace arms would push Raytheon Technologies ahead of Boeing for global defense sales as calculated by the Stockholm International Peace Research Institute based on 2017 totals, trailing only Bethesda, Md.-based Lockheed Martin.
At projected revenue of $73.6 billion in 2019 from the businesses it would retain after the Otis and Carrier spinoffs, Raytheon Technologies would challenge Airbus as the second largest company behind Boeing for global sales among those serving both the defense and commercial sectors on the SIPRI study, slightly ahead of Lockheed Martin; with General Dynamics and its Electric Boat submarine shipyard in Groton a distant fourth.
Hayes estimated Monday about the deal needs approval from about 10 entities with regulatory or oversight functions, and that he did not anticipate hurdles to getting those approvals. After President Trump said Monday on CNBC’s “Squawk Box” that he was “a little concerned” about the merger’s impact on the Pentagon’s ability to negotiate optimal contract terms, Kennedy told CNBC the companies do not have competing product sets, with Hayes saying they would brief the president today on their outlook for job growth. United Technologies and Raytheon do not list each other as competitors in their annual reports to the Securities & Exchange Commission.
In a research note cited Monday by Barron’s, JPMorgan Chase analyst Stephen Tusa said the companies get three immediate benefits in scale, diversity of product sets within the context of aerospace and defense; and financial heft.
“Investors have long wondered how Raytheon would create value with its under-utilized balance sheet,” Tusa said, according to Barron’s. “Management devised a clever and unexpected answer: sell that balance sheet to (United Technologies) for a stake in the combined company,”