Raytheon and United Technologies Merge to Diversify

Raytheon Company (RTN) and United Technologies Corp. (UTX) have announced they will be merging in an all-stock deal to form a defense and aerospace conglomerate worth about $121 billion with expected 2019 sales of approximately $74 billion.

Investors cheered the news by pushing shares of Raytheon and United Technologies higher by 8.7% and 4.4%, respectively, in pre-market trading on Monday morning.

The "merger of equals" is expected to close in the first half of 2020 after the Otis elevator and Carrier air conditioning businesses are spun off from United Technologies. The new company, Raytheon Technologies Corporation, will be 57% owned by United Technologies shareholders and 43% owned by Raytheon shareholders. Greg Hayes, United Technologies chair and CEO, will be named CEO, and Tom Kennedy, Raytheon chair and CEO, will be appointed executive chair. The new board of directors will consist of eight directors from United Technologies and seven from Raytheon with the lead director from the latter.

“It’s largely a diversification play to build an absolute behemoth aerospace and defense contractor,” said Douglas Rothacker, an analyst at Bloomberg Intelligence, to the Los Angeles Times. The two companies have common customers but don't have much overlap when it comes to their businesses. The merger will reduce risk of concentration and create "a broad and complementary portfolio of platform-agnostic capabilities."

"The combination of United Technologies and Raytheon will define the future of aerospace and defense," said Hayes in a press release. "Our two companies have iconic brands that share a long history of innovation, customer focus and proven execution. By joining forces, we will have unsurpassed technology and expanded R&D capabilities that will allow us to invest through business cycles and address our customers' highest priorities. Merging our portfolios will also deliver cost and revenue synergies that will create long-term value for our customers and shareowners."

The two firms said Raytheon Technologies will return $18-$20 billion of capital to shareholders in the first three years following completion of the merger. Gross annual run-rate cost synergies are expected to cross $1 billion by year four post-close, and approximately $500 million in annual savings is expected to be returned to customers. The net debt of the company at the time of closing is expected to be approximately $26 billion, with over 90% contributed by United Technologies.

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