United Technologies in talks to merge with Raytheon, creating world's second-largest defense company: Report


United Technologies Corp and Raytheon are in talks for a merger that could make the new entity the second largest defence company by sales in the world.
United Technologies Corp and Raytheon are in talks for a merger that could make the new entity the second largest defence company by sales in the world.PHOTOS: EPA-EFE

WASHINGTON (REUTERS, AFP) - United Technologies Corp and US arms giant Raytheon are in talks over a merger deal that could create one of the world's biggest aerospace and defense companies, the Wall Street Journal reported on Saturday (June 8).

According to the newspaper the two companies - which together have a market value of roughly US$166 billion (S$226 billion) - could announce an all-stock deal in the next few days. The new entity would be the world's second-largest defense company by sales after Boeing.

United Technologies provides primarily commercial plane makers with equipment such as electronics and communications equipment, whereas Raytheon is a vendor mainly to the US government for equipment in military aircraft and missiles.

The deal would be structured as an all-stock merger of equals because United Technologies would separately spin off its Carrier air conditioning business and Otis elevator division, as it has previously announced it would do, the source said.

United Technologies has a market capitalization of US$114 billion, but without Carrier and Otis, its value could be less than US$60 billion, bringing it closer to Raytheon's market capitalization of US$52 billion.

If the negotiations between United Technologies and Raytheon are completed successfully, a deal could be announced as early as Monday, the source added, asking not to be identified because the matter is confidential.

The Wall Street Journal first reported on the potential deal, stating that United Technologies chief executive Greg Hayes is expected to lead the newly created company, while Raytheon CEO Thomas Kennedy would be chairman.

Raytheon, maker of the Tomahawk and the Patriot missile systems, and other US military contractors are expected to benefit from strong global demand for fighter jets and munitions as well as higher US defense spending in fiscal 2020, a lot of it driven by US President Donald Trump's administration.

However, Pentagon spending is projected to slow down after an initial boost under Trump. A deal with United Technologies would allow Raytheon to expand into commercial aviation, which does not rely on government spending like the defense sector.

Conversely, United Technologies could benefit from reducing its exposure to commercial aerospace clients amid concerns over the rise of protectionism in international trade. The International Air Transport Association, which represents about 290 carriers accounting for more than 80 per cent of global air traffic, cited these concerns earlier this month, when it said that the industry is expected to post a US$28 billion profit in 2019, down from a December forecast of US$35.5 billion.

CHINESE SCRUTINY

Chinese authorities scrutinized United Technologies'US$23 billion acquisition of Rockwell Collins heavily, given its footprint in that country's market. This resulted in the deal closing in November 2018, as opposed to the third quarter of that year, which the companies initially targeted.

Trade tensions between the US and China were blamed at least partly by analysts for that delay, and it is not clear whether the deteriorating relations between the world's two largest economies could also weigh on the Raytheon deal.

United Technologies and Raytheon appear to have little overlap in their businesses, an argument the companies could make once US antitrust regulators start scrutinizing their merger. However, major commercial aerospace companies, such as Boeing and Airbus, as well as the US Department of Defense, have been known to use their significant purchasing power to seek concessions from their suppliers.

The deal with Raytheon could put pressure on General Electric, which also competes with United Technologies for commercial aerospace clients, to seek scale. It could also push other defense contractors, such as Lockheed Martin Corp , to explore expanding their commercial businesses.

Last year, military communication equipment providers Harris Corp and L3 Technologies Inc announced an all-stock merger that, once completed this summer, will create the sixth-largest US defense contractor.

United Technologies was previously a bigger player in the defense sector. But in 2015, it agreed to sell Sikorsky, the maker of military helicopter Black Hawk, to Lockheed Martin for US$9 billion.