United Technologies, a multinational industrial conglomerate, has agreed to buy Rockwell Collins, an aerospace manufacturer, for $30 billion. This is being touted as the largest aerospace deal in history – United already holds what will now be the second-biggest acquisition, which occurred in 2012 when the company purchased Goodrich, an airplane parts maker, for $16.5 billion.
What Does This Mean to Clients and Investors?
United will pay $140 a share in cash and stock: Rockwell shareholders will receive $93.33 per share in cash and another $46.67 in United stock. This represents an 18% premium from when the deal was first reported last month and 30% more than where the stock settled in July.
The move will come with approximately $500 million in cost savings over four years, but United will take over Rockwell’s $7 billion debt. These savings will stem from eradicating the costs of being a publicly-traded company for Rockwell and duplicative sales expenses.
Greg Hayes, United CEO, will stay on as chief executive of the merged company. Kelly Ortberg, Rockwell CEO, will be head of a new enterprise called Collins Aerospace. In a press release, Ortberg said that it all comes down to competition:
We are extremely pleased to announce this compelling transaction with UTC which is a testament to the value we have created for Rockwell Collins’ employees, customers and shareowners. The combination will enable us to compete more effectively for future business through continued investments in innovation, world-class integrated product offerings and the ability to retain the top talent in the industry. We look forward to the next chapter in Rockwell Collins’ long and proud history, as part of UTC.
Hayes added that clients will receive exceptional value:
This acquisition adds tremendous capabilities to our aerospace businesses and strengthens our complementary offerings of technologically advanced aerospace systems. Together, Rockwell Collins and UTC Aerospace Systems will enhance customer value in a rapidly evolving aerospace industry by making aircraft more intelligent and more connected.
In the end, the merger will transform the aerospace parts market as Rockwell will provide United with a greater presence. Rockwell specializes in communications systems and cockpit displays for the military and passenger jets and currently supplies Boeing and Airbus SE with aerospace equipment. The Iowa-based firm recently bought B/E Aerospace for $6 billion, which allowed the business to make plane seats and interiors.
In 2016, United generated nearly $30 billion in revenues, and its other businesses had roughly $29 billion in revenues. Rockwell, meanwhile, reported sales of about $5.3 billion.
Do United & Rockwell Risk Losing Clients?
There likely will not be any anti-trust issues because both businesses manufacture different airplane parts. However, financial analysts did warn that the companies may have a hard time selling the merger to their customers.
With the establishment of a new behemoth in the aerospace parts industry, plane makers may try to carve their own paths. Reportedly, soon after the deal was announced, Boeing noted that it was attempting to construct its own avionics business. Airbus has regularly urged United to concentrate on rectifying industrial problems, ones that cause delays in new aircraft deliveries.
But Hayes thinks the integration can remedy these widespread concerns by lowering prices. In July, Hayes stated in a conference call that airplane manufacturers “are going to take more of the aftermarket or demand more of the aftermarket, we're going to have to think about how we price our products.”
Simply put: if the price is right, the Boeings and Airbuses of the marketplace are not going to take their business elsewhere.
Will Jobs be Shed?
In any merger, there is usually job losses thanks to position duplication. That said, Hayes told CNBC on Tuesday that the purchase “is not a jobs story” and “is not about closing a lot of factories”:
If you take a look: public company costs, those are easy, those go away. Duplicate divest SG&A, overhead costs of running the businesses, that goes away. Supply chain savings, being able to leverage the scale of UTC's procurement organization, both direct and indirect. And there's a little bit of factory. But this is not a jobs story. This is not about closing a lot of factories.
But it's behind us is the good news. And we're up moving up to our deal. I think the good news is if we look at Rockwell, because it's such a great fit and there is so little overlap and the anti-trust issues are minimum, less than a couple hundred million dollars of product overlap, we should get this thing closed. And we should get those synergies quickly.
It still sounds like some jobs will be shed, but perhaps not many. However, the potential for significant job loss still exists, as there could be several modifications to United’s business model over the coming years. United maintains an extensive portfolio, including the production of Otis elevators and Carrier air conditioners. This has also enabled the company to accumulate a high level of debt. There has yet to be a decision on whether United will sever ties with a few of its brands or not. If some businesses are sold off, then there will inevitably be job losses, especially if other firms are looking to integrate, merge, or expand their own portfolios.
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