Not since Lockheed Martin acquired Sikorsky Aircraft from United Technologies in 2015, the acquisition of Rockwell Collins by United Technologies (UTC) in 2018, Northrop Grumman’s acquisition of Orbital ATK and L3’s acquisition of Harris last year has there in my view been such a really fascinating piece of US defence and aerospace sector M&A activity than that of the proposed merger announced yesterday between the Raytheon Company and United Technologies Corporation.
Raytheon is a long established and highly successful Massachusetts based defence contractor manufacturing a range of electronic warfare weapon systems, missiles, command and control systems, sensors and imaging equipment and cyber security. The company also has a significant range of UK based operations focused on four key areas – Airborne ISR, Precision Weapons, Cyber & Intelligence and Mission Critical Systems – and is growing through leading the design, development and delivery of cutting-edge technologies, services and world-class domain expertise.
Even though US president Donald Trump is reported to have expressed reservations in respect of the merger and in relation to ensuring that sufficient levels of sector competition remain, I suspect, particularly given the lack of product overlap, that although the Pentagon can be expected to examine the proposals very closely, unless anyone else comes in to spoil the party – unlikely in my view – this one has all the makings of moving through to a successful outcome.
In respect of detail, United Technologies Corp (UTC) and Raytheon are proposing a $121 billion (£96 billion) deal that combines the manufacturing of missiles and electronic warfare systems company Raytheon of the latter with the company that owns the aero-engine manufacturer Pratt & Whitney. Once merged the company would operate under the title Raytheon Technologies Corporation. If successful the combined operation would be second only in respect of prime defence contractors to that of Lockheed Martin.
Billed as a merger of equals with UTC shareholders owning 57% and Raytheon shareholders the remaining 43% the combined operation would have pro-forma annual sales of approximately $74 billion. Neither do I see this proposed merger as being a signal that either the defence or commercial aerospace cycles are peaking as some have suggested.
United Technologies which owns the world’s third largest aero-engine manufacturer Pratt & Whitney had begun the process of splitting itself up when it announced last year the intention to spin-off its Otis Elevator and Climate Controls and Security businesses (the latter is now called Carrier). Having completed the sale of Sikorsky to Lockheed Martin two years earlier and subsequently also completed the interesting acquisition of Rockwell Collins in order to create a US industry leading aerospace systems supplier (now called Collins Aerospace Systems) few had anticipated a move on the scale of that announced yesterday in the form of a full merger with Raytheon. This however is a deal that makes good sense.
That said, unlike some others I personally do not believe that this should be seen as the start of another round of defence/aerospace industry consolidation. If the proposed merger succeeds the new company will be split roughly 50/50 as to defence and commercial aerospace.
Both companies invest significant sums in research and technology development and we are told that plans exist to spend a combined $8 billion on R&D on items such as hypersonics and future missile systems; directed energy weapons; intelligence, surveillance, and reconnaissance (ISR) in contested environments; cyber protection for connected aircraft; next generation connected airspace; and advanced analytics and artificial intelligence for commercial aviation.
CHW (London – 11th June 2019)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785