The market doesn’t seem to like the merger of equals that Raytheon (NYSE:RTN) and United Technologies (NYSE:UTX) presented on June 9. Shares initially popped on the news, but have come down as a host of interested parties have weighed in. RTN stock is off 4.5% since the announcement.
The deal has an estimated value of $166 billion. Raytheon shareholders are due to get 2.3348 shares of a new company for each of their shares. Combined, the units have $74 billion in revenue. This is already creating a ripple effect across the country as local reporters ask what it means for their economies. The combined company — Raytheon Technologies — will be based at Raytheon’s suburban Boston offices.
There has been some speculation that the merger, scheduled to close early in 2020, may not happen. The President is worried the merger could cut competition. The head of Air Force procurement has called it a security concern. Hedge fund managers Dan Loeb and Bill Ackman are questioning the deal’s logic.
Scuttle the Deal?
The Air Force’s primary acquisition executive, Will Roper, wasn’t talking about scuttling the deal, however, just holding more frequent competitions in a bid to see more companies. Other aerospace companies were also trying to look on the bright side of the merger.
Raytheon is best known for making missiles and the systems that find their targets. United Technologies’ defense work is focused on avionics and airplane parts, including Pratt & Whitney engines. Much of UTC’s work is done in Iowa, Raytheon in California and the Southeast U.S. There is little overlap between the product lines, which means the merger is likely to go through.
When defense bureaucrats talk about “new competitors,” they’re often dreaming of space weapons that might bring companies like Elon Musks’s SpaceX and Jeff Bezos’ Blue Origin to the party.
SpaceX has been battling ULA, a joint venture of Boeing (NYSE:BA) and Lockheed Martin (NYSE:LMT), for Air Force launch contracts, including classified payloads. Blue Origin won a $500 million contract for rocket development last year.
They may also be dreaming of companies like Alphabet (NASDAQ:GOOGL), which backed away from a drone contract last year after employees objected, but has recently been hedging on that. The Defense Department is also choosing between Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) for a defense cloud.
The hope of the merger partners is that consolidations will create efficiencies. The hope of investors and analysts is that it will create monopoly pricing power.
Companies that specialize in defense contracts, however, have been losing out lately to companies like Boeing, which do both military and civilian work.
The military budget has been quietly increased for five years now. It’s now about $750 billion, levels achieved at the height of the Iraq War. While the Administration has been threatening war with Iran and Venezuela, it has yet to enter any new conflicts. But we’re still in Afghanistan, and troops are still stationed in other hot spots around the world.
Bottom Line on RTN Stock
The deal is termed a merger of equals. It will be based at Raytheon’s offices but Greg Hayes, United Technologies’ CEO, will run it. UTC shareholders will have 57% of the new company. The merged entity will be the second-largest defense contractor after Boeing, passing Lockheed-Martin.
War remains a very good business, an enormous source of jobs and a technology driver. The only risk in this deal is that peace breaks out. That seems unlikely.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear , 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 shares in AMZN and MSFT.