Mergers & Acquisitions

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>>> The Criticized Raytheon-United Technologies Deal Looks Smart Now

The pandemic has slammed the commercial aerospace business, but defense spending remains robust.


Bloomberg

June 8, 2020


https://www.bloomberg.com/news/articles/2020-06-08/raytheon-and-united-technologies-merger-looks-pretty-smart?srnd=premium


Around this time last year, United Technologies Corp. and Raytheon Co. announced their plans to create an aerospace and defense behemoth with about $75 billion in sales. In short order, activist investor Bill Ackman declared he couldn’t “comprehend the strategic logic” of pairing the UTC airplane parts divisions with Raytheon weapons businesses that he deemed “of inferior quality.” Fellow UTC shareholder Dan Loeb followed with his own blast, calling the deal “ill-conceived” and “motivated by empire building.”

Today, shareholders have to be feeling pretty grateful they didn’t listen to Ackman or Loeb and instead approved the all-stock deal that created Raytheon Technologies Corp. earlier this year.

The argument against the merger was that it would turn United Technologies back into a conglomerate just after it had at long last agreed to unwind its sprawling structure through the spinoffs of its Carrier climate control and Otis elevator units. That critique felt off the mark: Sure, jet engines and missiles are different businesses, but the markets are complementary, have similar capital requirements and profit margins, and are followed by many of the same Wall Street analysts. In an interview at last year’s Paris Air Show, Toby O’Brien—now chief financial officer of Raytheon Technologies—cast the deal as a way to make the combined businesses more resilient in the event of a downturn. At the time, the commercial aerospace and defense industries were both seeing robust growth. But it’s rare for the two to move in tandem, and eventually that dynamic would end, O’Brien said.

And end it did. While no one could have predicted the coronavirus pandemic, the merger’s benefits are more apparent than ever. In comparison with a commercial aerospace sector that’s been rocked by a precipitous drop-off in air travel, the legacy Raytheon defense businesses have remained healthy as cash continues to flow from governments committed to supporting critical infrastructure investments. “We generally see the year playing out consistent with how we saw it at the beginning of the year,” O’Brien said of the defense divisions on June 2 at a UBS Group AG conference. How many other businesses can say they’re still more or less where they expected to be in January?

That’s an asset for Raytheon’s financials: The defense businesses should generate about $3.5 billion of free cash flow this year, O’Brien said, helping offset what’s expected to be a break-even performance from the legacy UTC aerospace units. But it also helps the company’s workforce. Whereas rival General Electric Co. is cutting about 25% of its aviation unit employees, Raytheon has so far managed to avoid mass layoffs, in part because it can reallocate workers to its healthier defense businesses.

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