Business

What could happen to Collins Aerospace's military GPS business once it's sold off? Analysts weigh in

Antitrust regulators with the U.S. Department of Justice have requested that Collins Aerospace divest its military GPS b
Antitrust regulators with the U.S. Department of Justice have requested that Collins Aerospace divest its military GPS business in the lead-up to parent company United Technologies’ proposed merger with Raytheon. The business employs hundreds in Cedar Rapids and Coralville. (The Gazette)
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As the $135 billion proposed merger between United Technologies Corp. and Raytheon Co. draws closer, the future of Collins Aerospace’s military GPS business in the Corridor is unclear.

The U.S. Department of Justice in October asked UTC’s Collins Aerospace — Cedar Rapids’ largest employer — to divest its GPS business, which develops technologies for space-constrained environments, anti-jam and anti-spoofing solutions, to satisfy antitrust concerns.

Raytheon Co., of Waltham, Mass., has a global positioning system and Navigation Systems business of its own.

Collins Aerospace’s military GPS business consists of hundreds of employees based in Cedar Rapids and in Coralville.

Of Collins Aerospace’s approximately 73,300 total employees, more than 10,000 currently work in Iowa — in Cedar Rapids, Coralville, Decorah, Bellevue and Manchester.

Collins Aerospace had not determined a buyer or timing for divesting the military GPS business as of late October, said Phil Jasper, head of the company’s Mission Systems business unit, in an Oct. 28 email to employees.

The company had “nothing new to report” regarding the transaction as of Thursday afternoon, spokeswoman Pam Tvrdy-Cleary told The Gazette.

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The Mission Systems business unit also encompasses military communication solutions, unmanned aircraft systems, ejection seats and propulsion, intelligence, surveillance and reconnaissance technologies and space solutions, according to a 2019 company fact sheet.

A ‘merger remedy’

Whoever buys the business likely will not have to physically take over the asset before the merger closes, so long as the two parties have a purchase agreement in place, said Yiming Qian, finance professor at the University of Connecticut, who has researched divestitures made during horizontal mergers.

Because of that, she said, “It sounds like they have a lot of incentive to find a buyer within the next several months.”

Almost any one among dozens of defense contractors potentially could bid on the military GPS business, said Loren Thompson, senior defense analyst with the not-for-profit Lexington Institute in Arlington, Va.

“Depending on price, (Collins Aerospace) won’t have trouble finding a buyer, but the barriers to entry in GPS are pretty low, so the question of future profitability would have to be raised,” he said. “The question is, can you justify the price that’s being asked, given the fact that you’re sure to have competitors?”

Thompson said there currently are more than a dozen GPS equipment suppliers to the military and commercial customers. Because of this, he added, “I’m not even sure this divestiture is necessary.”

Justice Department and Federal Trade Commission regulators historically have rarely made major objections in defense company mergers, said William Hartung, director of the Arms and Security Project at the Center for International Policy in New York City.

“When they do act, it tends to be sort of like in this case, where they’ll look at maybe a couple of units that might overlap and decide that piece of it has to be dealt with,” he said.

In fact, Qian said, combining companies oftentimes will volunteer to sell off some of their businesses as a “merger remedy” to appease antitrust regulators.

“A direct request or challenge from regulators is actually less common because many times the companies anticipate and, as part of the deal, will offer to sell some of their assets,” she said.

“Obviously they want to keep their most valuable core assets, but sometimes they have to let go of some of those to mitigate the anti-competition concerns.”

Hartung, at the Center for International Policy, said the military GPS business could be an “attractive pickup” for one of a handful of major companies — such as Lockheed Martin, Boeing, Northrop Grumman or General Dynamics — though he believes a relatively small number are likely to bid.

The size of the pool of potential buyers depends on whether Collins Aerospace is able to divest its business outside the defense industry, such as to a civilian GPS company, Qian said.

If not, she said, there are only a few candidates, such as Honeywell or Lockheed Martin.

“One thing we can say for sure,” Thompson at the Lexington Institute said, is that the military GPS jobs will not disappear.

“It’s not as though anybody would want to shut this business down because it’s a useful franchise,” he said. “The only question is, who will the purchaser be and how might they want to organize their own operation.”

A new buyer would by necessity move the military GPS business out of Collins Aerospace’s existing facilities, Thompson said, and one could presume a buyer such as Lockheed Martin or Northrop Grumman — respectively headquartered in North Bethesda, Md., and Falls Church, Va. — would like the business closer to their existing electronics sites.

That being said, he added, “Cedar Rapids is not a high-cost area. It’s got a long tradition of doing this kind of work without being an expensive operating location, so there is a logic to staying there. If (a new buyer) tried to move (the business) to a place like Florida, it would take a long time to reconstitute their workforce.”

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“It could cut either way” in terms of whether a new buyer would keep the military GPS business in Iowa or move elsewhere, Hartung said.

“Part of it would depend on how important they feel the Iowa delegation is in terms of their positioning and key communities and so forth,” he said. “In general, the companies like to be able to say, ‘We’re present in 30, 40, 50 states’ to make it seem like they’re kind of indispensable economically, and not just from a security point of view.”

Also “tough to judge,” Hartung said, is whether the buyer might stay in Iowa in part due to subsidies — such as Iowa’s Research Activities tax credit, under which companies can receive millions each year for basing qualifying R&D within state boundaries.

“Often, the companies exaggerate the possibility that they could leave because who doesn’t want subsidies?” he said. “That doesn’t necessarily mean that, if they were reduced or adjusted, they would automatically be looking to bolt out of Iowa.”

And if jobs appear to be in danger in a “political tossup” state like Iowa during an election year, Thompson said, there’s a chance Iowa’s congressional delegation or even the Trump administration could speak up.

“This is an administration that pays a lot of attention to where the jobs go,” he said. “If the local congressional delegation raises an issue about where the jobs are going, it will get traction in an election year at the White House.”

United Technologies Corp. and Raytheon Co. on June 9 announced their plans to form Raytheon Technologies Corp. in an all-stock merger of equals.

Both companies’ shareholders voted Oct. 11 to approve the deal, which company executives expect to close within the first half of 2020.

Comments: (319) 398-8366; thomas.friestad@thegazette.com

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