Is Bigger Better? United Technologies Buys Rockwell Collins

By Rajan Gupta,
Money and Investing Writer

Industrial conglomerate United Technologies Corp. (NYSE: UTX) reached a deal on Monday September 4th to buy airplane-parts maker Rockwell Collins Inc. (NYSE: COL) for $23 billion, the largest aerospace deal in history.

CEO of United Technologies Greg Hayes would remain CEO of the combined company, while the CEO of Rockwell Kelly Ortberg would run a new business called Collins Aerospace, a division which would combine the parts manufacturing businesses of the two companies.

Both companies have approved the deal in which United Technologies will pay $140 a share in cash and stock, of which Rockwell investors will get $93.33 per share in cash, and $46.67 in United Technologies stock. This price point represents an 18% premium to where Rockwell traded before the potential deal was leaked. Following the formal announcement, shares of Rockwell rose 0.3% to $131.00 while shares of United Tech fell 5.7% to $111.21.

The deal represents a strategic victory for United Technologies, since their product and Rockwell’s product have virtually no overlap, minimizing any concerns about a lack of competition for certain airplane parts. Cowen analyst Cai von Rumohr expressed that this deal “gives United Technologies complementary products, especially avionics and IMS, to maximize potential for digital applications”.

However, U.S. plane maker Boeing (NYSE: BA) has expressed concern about the deal, notably mentioning that it intends to take a “hard look” at the proposed deal. This statement was deemed the primary reason for the 5.7% drop in United Tech stock.
Boeing’s concerns are not unfounded. Kevin Michaels, president of the consulting firm AeroDynamic Advisory, noted that the combined companies would represent more than 50 percent of the systems content on a Boeing 787 aircraft, by dollar value at least. This could give the combined company additional leverage over Boeing, a fact which both of these companies are keenly aware of.

Additionally, Boeing could also be concerned about what is known as the “portfolio effect”. Reuters explains that a portfolio effect is “where companies are able to exercise leverage based on the fact that they sell a wide range of specialized products to certain customers.” Both companies are acutely aware of the potential fallout from this deal, and United Technologies has already begun its attempt to market the deal to companies like Boeing and Airbus (EPA: AIR), major players in the planemaker industry.

Despite these attempts, analysts and investors have remained skeptical that the deal will pass government scrutiny, either in the United States or in the EU. On paper, this merger deftly evades antitrust law, yet it still raises questions about the power this combined company would have.

Ultimately, Boeing and Airbus will have a critical part to play in this merger, since they both have “disproportionate influence” on deals through their supply chains, according to William Blair analyst Nicholas Heymann.

He notes that they both hold contractual clauses which give them broad authority over parts production. In fact, Bloomberg reports that Boeing “may be able to renegotiate terms of some of its supplier agreements with Rockwell Collins because of a provision allowing the contracts to be reopened if there is a change in control.”

 

A version of this article appeared in the Tuesday, September 12th print edition.

Contact Rajan at
rajang456@gmail.com

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