United Technologies in talks with Raytheon to merge
All-stock deal would create giant supplier of military equipment to US government
United Technologies is nearing an agreement to merge its aerospace business with Raytheon in a deal that would create a new giant in the sector, said people briefed on the matter.
The two groups are finalising an all-stock agreement that may be announced on Monday before US stock markets open, said one person.
The decision to bring together the companies’ aerospace business will not impact United Technologies’ plan to spin off its Otis elevator and Carrier building-systems businesses into separate units.
Combining the two companies will help them compete globally at a time when US companies face mounting challenges due to the trade war launched by US president Donald Trump against China.
Gregory Hayes, chairman and chief executive of United Technologies, is expected to become the chief executive of the new company, while Thomas Kennedy of Raytheon would take on the chairmanship, said a person briefed on the matter.
The deal would create a powerhouse supplier of military equipment to the US government, bringing together the third-largest recipient of defence spending last year, Raytheon, with the eighth-largest, United Technologies. The two companies together were paid about $24.3bn by the US defence department in fiscal year 2018, not far short of the $27.4bn paid to the second-largest recipient, Boeing.
Raytheon, whose shares have fallen by 10 per cent over the past year, has a market value of $52bn and net debt of about $4bn. Shares in United Technologies have risen 3.4 per cent in past year, giving it a market value of $114bn including the units of its business that will not be part of the tie-up with Raytheon. It has net debt of $44bn.
An agreement would cap a wave of deals in the aerospace and defence industry. UTC in 2017 agreed to buy Rockwell Collins for $23bn in a deal to create one of the largest suppliers to the aerospace industry.
Last October, two other US defence companies, L-3 Technologies and Harris Corp, agreed to merge to form a company with $16bn in revenue focused on defence electronics and military communications.
The deal, if agreed, will also have far-reaching repercussions for the US defence industry, which for the past two decades has been dominated by five “prime” contractors — Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon — companies with the technological and financial firepower to deliver programmes for the Pentagon. The new L-3 Harris Technologies was pitched as a non-traditional, more innovative “sixth” prime.
It also comes at a difficult time for Boeing, which has been focused on the fallout from the 737 Max crisis in the wake of two deadly crashes.
“It’s certainly an unexpected development,” Richard Aboulafia, defence industry analyst at Teal Group, said.
“The resulting company would be extremely diverse but exposed to extremely different markets and cycles. It would make for a much more formidable supplier, with a lot more negotiating power, spread across both their commercial and military lines.”
The Wall Street Journal first reported news of the talks.