United Technologies Corporation (NYSE:UTX) finally pulled the trigger on Rockwell Collins, Inc. (NYSE:COL), bidding $140 per share for the avionics supplier, a deal worth $30 billion when debt is added in.
The terms are $93.33 in cash and $46.67 in UTX stock, so the final value could rise or fall, depending on what happens to UTX between now and its closing. The value of the stock in the deal, at the September 5 opening price, was about $7.6 billion.
Uncertainty over the value of the stock is one reason why Rockwell’s stock price did not move much after the announcement was made. It was expected to open at $132.30 per share. UTX fell in overnight trading after the deal was announced, to $115.75.
While investors right now are focused on what consolidation among parts suppliers may mean to Boeing Co (NYSE:BA) or Airbus and whether the deal will close. Wise investors are looking more closely at what United Technologies may look like after the merger.
Merge to Break Up?
Speculation is rising that United may follow-up on its deal with Rockwell by splitting itself up, combining the two companies’ avionics divisions, then breaking off the units that make Otis elevators and Carrier air conditioners.
After United bought Goodrich, another aviation equipment maker, in 2012. United agreed to sell Goodrich units and offer a European competitor, Rolls Royce, the chance to buy one of its research projects, to please regulators.
This spin-off would be much larger, and could prove more valuable in the long run. United’s jet engine unit, Pratt & Whitney, and its aerospace units are growing much faster than the operations at either Otis or Carrier, meaning a squeeze on Boeing and Airbus could create profits.
On the other hand, Rockwell Collins has just completed the acquisition of B/E Aerospace, which makes aircraft interiors, and the financial machinations could cause problems in operations. United doesn’t need such problems. It has enough of them with its latest Pratt engine.
Despite what some investors may believe, companies are not chess pieces that can be moved about with abandon. Takeovers are events that happen to people, not just cash flows. This means they can create tension that can spill into operations, which, in the highly competitive world of aerospace, investors do not need.
Going into the deal, United analysts were bullish on the company, with nine saying buy it and none saying sell. The analyst view on Rockwell Collins was even more bullish, and those analysts were looking clever after the deal announcement.
The question for investors now is whether management can execute on its financial plans and its operational ones as well. United is still dealing with the fallout of moving Carrier jobs to Mexico, despite some promised tax breaks, and it will need administration approval to get this deal done.
Otis Elevator, meanwhile, is facing new competition from companies making elevators without cables, using Maglev technology instead to allow construction of taller buildings and even “elevators” that move sideways.
The point is that there is less certainty than there appears to be in the United Technologies portfolio, and the Rockwell deal, even if approved, is only going to add to it. Small wonder, then, that traders are unwilling, so far, to bid Rockwell Collins stock to this deal’s strike price. It’s important that investors understand the risks before they bid it higher as well.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.