Will Trump Object to the Raytheon-United Technologies Merger?

The proposed $74 billion merger of Raytheon and United Technologies would be the largest defense-related merger in decades. The deal would create America’s second-largest aerospace-and-defense firm by revenue, behind only Boeing. From a purely defense perspective, the firm would be second-largest to Lockheed Martin.

The new firm, to be called Raytheon Technologies, would be based in the “greater metro Boston area,” perhaps not far from Raytheon’s corporate headquarters in Waltham, Massachusetts. Executives expect the deal to close in the first half of 2020.

On Monday morning, President Trump appeared to compare the proposed merger to consolidation among American airplane manufacturers.

“They’ve all merged in, so it’s hard to negotiate when you have two companies and sometimes you get one bit,” Trump said on CNBC.

“When I hear their merging, does that take away more competition?” he said. “It becomes one big, fat, beautiful company, but I have to negotiate, meaning the United States has to buy things and does that make it less competitive because it’s so already non-competitive.”

Soon after Trump’s comments, the companies’ CEOs also appeared on CNBC. Raytheon CEO Tom Kennedy and UTC CEO Greg Hayes. Kennedy, who would be the new firm’s executive chairman for two years, and Hayes, who would be CEO, played down potential for less competition in the sector.

“Once [Trump] understands the benefits of this merger in terms of what it's going to do to reduce costs to the government, what it’s going to do to improve technology of the U.S. and its defense profile and what it's going to do for jobs in this country, I think he's going to be supportive, as he has been for both of our companies over his administration,” Hayes said.

Said Kennedy: “We are complementary. We are not competitive. I don’t remember the last time we competed with them.”

On a call with investment analysts on Monday morning, the CEOs touted their firms’ combined $8 billion of internally funded research and development, and said it would help the merged company win next-generation franchises and create more U.S.-based manufacturing jobs.

Wall Street analysts said the merger would create a more balanced defense/commercial company.

“This could lead to a rising belief that defense ‘needs’ to be paired with commercial,” Citi analyst Jon Raviv wrote in a note to investors early Monday. “Not so much to stabilize or diversify the portfolio, but to provide deeper pockets with which to invest in new capabilities & perhaps to drive new business models.”

The merger would create an aerospace and defense conglomerate at a time when companies are simplifying their business, Moody’s analyst Jonathan Root said.

"[General and administrative] synergies are likely, with the potential for greater commercialization of technologies that the two companies’ research and development organizations will share across their separate commercial and defense product and service offerings," he wrote.

There is overlap in the two firms’ portfolios, Capital Alpha Partners analyst Byron Callan, wrote in a Saturday note to investors soon after the Wall Street Journal first reported the deal was in the works.

Both companies have communications business as well as imaging and infrared products, Callan noted.

Cowen & Company analyst Roman Schweizer pointed to overlap in “command, control and communications; electronic warfare businesses, and positioning, navigation and timing. For the most part, these are competitive markets with both U.S and international competitors,” he wrote Monday in a note to investors.

Callan does not expect the Pentagon to object to the merger, but said “small divestitures” might be needed.

“In a different administration, there might be concern about the clout and influence of the UTX-RTN entity — such concerns were belatedly raised on the LMT-Sikorsky deal, but we don’t believe those views now exist in DoD,” Callan wrote.

Pentagon leaders predicted a rush of mergers and acquisitions in 2011, a time when the Pentagon budget began contracting. Ash Carter, the Pentagon’s top weapons buyer early in the Obama administration, who became defense secretary at the end of the president’s term, was opposed to consolidation of top-tier defense suppliers.

In 2015, just before Lockheed Martin purchased Sikorsky from United Technologies for $9 billion, Frank Kendall, the Pentagon’s top weapons buyer, said the deal raised “significant policy concerns” even though the Defense Department did not object to the sale.

“The Department of Defense is concerned about the continuing march toward greater consolidation in the defense industry at the prime contractor level,” Kendall said at the time.

Ellen Lord, Kendall’s successor, “is engaging with industry leadership to understand the implications and governance as a result of this acquisition,”  Lt. Col. Mike Andrews, a Pentagon spokesman, said in an email Monday. “We look forward to working with Raytheon Technologies Corps. to provide the best capabilities our warfighters deserve, at the greatest value to the taxpayer."

In October 2018, Lord, the undersecretary for acquisition and sustainment, touted “a new process where as soon as we know about [a merger or acquisition] we go out with a data call to all components [and] all services.

“We take a look at that and if there are any concerns, we work closely with either FTC or DOJ,” she said. “[I]f there is a concern then we have consent decrees and deal with that.”

As for the Pentagon’s M&A policy: “Basically, we like market forces to play out. It’s by exception that we would intervene,” Lord said.

Defense & aerospace mergers since 2015:

• February 2015: Harris announces it will acquire Exelis for $4.6 billion.
• July 2015: UTC announces it will sell Sikorsky to Lockheed Martin for $9 billion.
• September 2017: UTC announces it will acquire Rockwell Collins for $23 billion.
• September 2017: Northrop Grumman announces it will acquire Orbital ATK for $7.8 billion.
• October 2017: Boeing announces it is buying Aurora Flight Sciences for undisclosed terms.
• February 2018: General Dynamics announces acquisition of CSRA for $9.6 billion
• July 2018: Boeing announces deal to acquire 80 percent of Embraer for $4.2 billion.
• September 2018: SAIC announces it will acquire Engility for $1.5 billion
• October 2018: L3 Technologies and Harris announce they will merge creating a $16 billion firm.
• June 2019: UTC and Raytheon announce a merger to create $74 billion Raytheon Technologies.