RAYTHEON & UNITED TECHNOLOGIES

By: Maximilian Zwiener

On April 3rd of 2020, Raytheon Company (NYSE: RTN) and United Technologies Corporation (NYSE: UTX) finalized their agreement for an all-stock merger of equals into $166 billion multinational aerospace and defense behemoth: Raytheon Technologies (NYSE: RTX) Raytheon shareholders received 43% of the combined company while United Technologies shareholders received 57%. Although United Technologies was still larger than Raytheon by $60 billion in market cap, the deal conditions stated that United Technologies would spin-off its extraneous elevator division Otis (NYSE: OTIS) and HVAC division Carrier (NYSE: CARR) before the merger’s closing Raytheon Company common shares were converted to 23348 Raytheon Technologies shares each and this exchange was structured so that no acquisition premium would occur; despite this, both companies’ stock prices jumped in pre-market trading after the deal was announced. However, United Technologies stock -just before the merger- dipped significantly to $4993 due to Covid-19 pressures on the commercial aviation sector

From an advisory standpoint, Citigroup Global Markets Inc. served as Raytheon’s financial advisor while Morgan Stanley & Co. LLC, Evercore, and Goldman Sachs & Co LLC served as United Technologies’ financial advisors. Additionally, RBC provided a fairness opinion for the price of the deal. In terms of individual specializations, United Corporations is a multi-industry conglomerate with diversified offerings catered to commercial platforms; Raytheon is more specialized in supplying the U.S. government with military aircraft and missile equipment. While they are both leaders in aerospace and defense, they have limited business overlap due to United Technology providing commercial equipment as opposed to militarygrade equipment Because of this, they believed they would be able to increase their market share and R&D without increasing anti-trust scrutiny Raytheon also rationalized that because of their different market focuses but highly complementary technology, they could expect roughly $1 billion in gross annual cost synergies alongside their revenue growth. By combining their expertise in commercial and military technology, Raytheon will strengthen its ability to invest in different business cycles and to lead innovation in A&D

Raytheon is currently trading at $100.58 per share with a TTM P/E multiple of 28.74 and TTM EPS of $3.50. The merger has proven to be successful so far, helping the share price rise 100% since the deal was announced in 2020. Because their primary strategic synergies are based on global innovation leadership goals increased R&D and cost-effectiveness the combined company’s defense segments (Raytheon’s contribution to the merger) have had better earnings relative to their commercial counterparts. For instance, from 2020 to 2022, Raytheon’s Intelligence & Space and Missiles & Defense segments have seen net sales growth of 30% while United Technologies’ Collins Aerospace and Pratt & Whitney segments have only seen 14% growth Because of this imbalance, I believe that there are still more synergies to be realized by Raytheon Technologies. One primary rationalization of the merger was the fact that their commercial and defense technologies complement each other, and although there is a roughly 50/50 split between the two, only the defense component has seen major growth- likely due to trends of increased military funding. Despite this disparity, there is a bright future for Raytheon Technologies; this is especially since Raytheon’s RIS and RMD segments will further merge, which will likely create more cost synergies Overall, Raytheon has superb experience with cost synergies in past acquisitions, and in the case of this one, have already surpassed their $1 billion synergy target by $400 million as of 2022