United Technologies-Raytheon Merger to Create Long-Term Value

Long-term value

The merger between United Technologies (UTX) and Raytheon (RTN) is likely to build a broad and complementary portfolio of high-growth aerospace and defense products. The new entity would have a diversified portfolio, which will reduce the risk of business concentration in one area.

United Technologies-Raytheon Merger to Create Long-Term Value

UTX and RTN have followed in the footstep of Harris (HRS) and L3 Technologies (LLL), which last year announced an all-stock merger. The merger would create the sixth largest defense contractor in the US and the tenth largest in the world.

The UTX-RTN merger will create the world’s second-largest aerospace and defense company after Boeing in terms of annual revenues. The combined company is anticipated to have nearly $74 billion in pro forma 2019 sales, while Boeing had generated record yearly revenue of $101 billion in 2018.

Further, the two companies project annual cost-saving of $1 billion beginning in the fourth year after the close of the transaction. It’s estimated that the merger will generate robust free cash flow and strengthen the balance sheet, thereby helping the new company to enhance shareholder wealth and increase investments. The companies forecast returning $18 billion to $20 billion to shareholders within three years following merger completion.

The two companies have outlined their long-term growth objectives as well. Following the merger completion, the combined company intends to spend more than $8 billion in research and development projects. Apart from developing new and critical technologies, the companies want to make advancements in developing hypersonics and future missile systems and directed energy weapons.

In the commercial aviation space, the combined company will focus on developing next-generation connected airspace, cyber protection for connected aircraft, and advanced analytics and artificial intelligence.

Stock performance

Shares of UTX and RTN have gained 24.1% and 21.2%, respectively, in the year so far, almost in line with the returns of the iShares U.S. Aerospace & Defense ETF (ITA), which is up 22.6% during the same timeframe. The ETF invests in US airplane and defense equipment manufacturers, assemblers, and distributors.