United Technologies and Merger Mania: Time to Call the Whole Thing Off?

From Dow component to disappearing act, United Technologies seems to have lost its mojo

For many years United Technologies (NYSE:UTX) has been something of a safety stock: a Dow component that’s been providing technology products and services to the global aerospace industry, a market that’s never out of style in a politically uncertain world. UTX stock has returned 22.5% so far in 2019.

United Technologies and Merger Mania: Time to Call the Whole Thing Off?
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Yet, not all is safe and sound in the minds and hearts of United Technologies stock investors, however, as last month’s announcement that the company would merge with top defense contractor Raytheon (NYSE:RTN) shook up the industry — and left shareholders wondering where the UTX stock price might go from here.

Merger Madness

The newly formed aerospace and defense conglomerate will be a new company called Raytheon Technologies; as the name implies, United Technologies as we know it will essentially disappear. Current holders of UTX stock need not panic, however, as the deal isn’t slated to close until the first quarter of 2020.

Nonetheless, United Technology stock holders might consider unloading some shares in anticipation of a rough landing, or at least setting a strict stop-loss 10% or even 5% below the current share price. While the two companies have touted the deal as a proverbial merger of equals, not everyone seems entirely comfortable with the formation of an aerospace-and-defense mega-company.

Behold, the Pushback

Among the critics of the United Technologies-Raytheon deal is none other than President Trump, who has expressed concern that the merger could reduce competition and make it difficult for the government to negotiate defense contracts. Trump has been known to pillory companies and then forgive them soon afterward, but as a personal preference, I’m not a fan of holding shares of companies that are in the crosshairs of the U.S. government.

On the flip side is the government’s ongoing need for defense-related services, which won’t be slowing down anytime soon. Looking over the coming fiscal 2020 U.S. defense budget, we can see that the Senate has already passed a $750 billion defense authorization bill by a vote of 86 to 8. With the U.S. embroiled in a heated conflict with Iran and its allies, the defense bill is likely to pass and government spending in that sector should hold steady or increase in the near term at least.

Time to Play Defense

This might not be enough to assuage concerned investors or prospective investors, though, as there’s no shortage of criticism of the merger. One prominent example would be activist investor and Third Point CEO Daniel S. Loeb. Another would be Pershing Square Capital Management Founder and CEO Bill Ackman. They’re both prominent UTX shareholders, and neither have been shy about voicing their strong disapproval of the merger.

For his part, Loeb has uncategorically stated that Third Point won’t support the merger “in its current form and plans to vote against it.” Moreover, he’s described the proposed combination of United Technologies and Raytheon as “ill-conceived and unlikely to create value for UTC shareholders.”

Ackman said that the merger “makes no sense to us” and that his firm “cannot comprehend the strategic logic” of the deal. The reasoning is complex, but to put it in a nutshell, the primary concern of these two hedge-fund managers — and of concerned investors generally — is that neither of the two companies will benefit from the proposed agreement in any appreciable way.

Bottom Line on United Technologies Stock

I don’t make it a policy to lean bearish on a name like United Technologies stock simply because a couple of famous financiers have expressed their concerns. Besides, given the political unrest happening in the world today, I’m decidedly bullish on the aerospace/defense market as a whole.

Still, even if we assume that the proposed merger goes through without a hitch, it won’t be the biggest company in its industry; Boeing (NYSE:BA) will still hold that title, at least in terms of annual revenue. Most importantly, I’ve been searching high and low for a solid rationale to justify this merger — and as U2 front-man Bono once sang — I still haven’t found what I’m looking for.

Therefore, I would steer clear of UTX stock for the time being at least; merger madness, powerful as it may be, need not affect our sanity.

As of this writing, David Moadel did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/united-technologies-and-merger-mania-time-to-call-the-whole-thing-off/.

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