Business

What we know so far about the United Technologies-Raytheon merger

'We don't see any impediment,' UTC CEO says

Last year, UTC needed approval from the U.S. Justice Department, Boeing and China before completing its purchase of Rockwell Collins, Cedar Rapids’ largest employer. (Liz Martin/The Gazette)
Last year, UTC needed approval from the U.S. Justice Department, Boeing and China before completing its purchase of Rockwell Collins, Cedar Rapids’ largest employer. (Liz Martin/The Gazette)
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Leadership at United Technologies Corp. and Raytheon Co. have for some time been working to craft Raytheon Technologies Corp., a new aerospace and defense behemoth the companies say will be a “premier systems provider with advanced technologies.”

With around a year to go until the $121 billion deal’s projected closing date, many in Eastern Iowa — including Collins Aerospace employees — have a significant interest in the result, and the path company executives take to get there.

Here’s a look at what is known so far:

What’s happened so far?

United Technologies and Raytheon Co. announced June 9 that the two companies agreed to form Raytheon Technologies Corp. in an all-stock deal. The so-called merger-of-equals is expected to be completed by the first half of 2020 — and hopefully by the end of the first quarter, executives said — forming a $100 billion colossus second only to Boeing size-wise for a U.S. aerospace company.

During an investors call June 10, Raytheon CEO Thomas Kennedy said he first suggested the merger to United Technologies CEO Greg Hayes over the phone in early summer 2018, highlighting the companies’ complementary products and platform-agnostic natures.

At the time, Hayes was busy working on his company’s $30 billion acquisition of Cedar Rapids-based Rockwell Collins. So he and Kennedy revisited the idea later in 2018, and their teams began work in January.

How will this affect employment?

Raytheon Technologies is expected to consist of around 180,000 employees worldwide, including approximately 60,000 engineers, according to a UTC managers guide.

Company websites say Collins Aerospace and Pratt & Whitney, the businesses remaining with UTC through the merger, have 73,300 and 41,600 employees, respectively, while Raytheon Co. has 67,000 employees, for a current combined total of 181,900.

Approximately 9,350 Collins Aerospace employees now work in Cedar Rapids, Coralville, Decorah, Bellevue and Manchester.

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In a June 9 email, Hayes told company workers, “For the vast majority of United Technologies employees, your role will not change.”

He elaborated in the June 10 conference call, saying, “There will be some facilities rationalization, but we’re not looking to consolidate a bunch of factories and we’re not taking out a lot of jobs. In fact, we’re going to create a lot of jobs through this merger.”

Hayes and Kennedy said during the call their companies intended to add around 10,000 employees apiece in 2019, with Hayes noting his company had hired 5,500 people so far.

In a June 12 Fox Business interview, Kennedy said the forecast is for Raytheon Technologies to provide over 70,000 “noble” jobs “that pay way over minimum wage” over the following five years.

“The folks that have those jobs, they can buy a home, they can send their kids to school, they can save up for retirement, they have great health benefits,” he said.

There will be some job loss at the corporate level, likely affecting UTC’s Otis or Carrier businesses, said Hayes at a June 17 meeting.

What structure will the new company have?

Raytheon Technologies will be headquartered in the greater Boston area, and plans to retain a “corporate presence” in Farmington, Conn., and Waltham, Mass., where UTC and Raytheon, respectively, are based, according to the managers guide.

The new company is expected to consist of four businesses, including UTC’s Collins Aerospace and Pratt & Whitney, and two Raytheon businesses formed from consolidating the companies’ current four businesses.

One new business, Integrated Defense and Missile Systems, will include two eponymous Raytheon businesses. The other, Intelligence, Space and Airborne Systems, will consist of:

• Raytheon’s Space and Airborne Systems

• Intelligence, Information and Services

• Forcepoint cybersecurity business

• Collins Aerospace’s Mission Systems unit, based in Cedar Rapids.

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In the June 10 call, Hayes described the merger as “integration-light,” beyond the corporate office and seeing “how we can take that capability (at Mission Systems) and then spread it across some of the Raytheon complementary businesses.”

“But beyond that, this is not really going to affect our businesses or our operations really anywhere,” he said.

Piecing Mission Systems together with the Raytheon entities is a matter of optimization, said Collins Aerospace CEO Kelly Ortberg at the June 17 meeting — though he added that the “how” still is unclear.

“We know there’s a lot of value in combining those capabilities, but how do we do that, that optimizes that ... you can’t have that all figured out pre-close,” he said. “So we’re going to work on that.”

“One of the things that we talked about is you can’t really pull the Mission Systems business out of Cedar Rapids and just move it into Raytheon,” Hayes added at the meeting.

“The operating model will be refined during the integration process and will be shared in detail when the transaction closes,” the managers guide reads.

What new capabilities are expected?

The merger is poised to create a “mouthwatering” range of technology synergies between the two companies that will address military and commercial customer needs, Paul Eremenko, senior vice president and chief technology officer with UTC, said during the June 17 meeting.

Chief among these will be hypersonic missiles, capable of flying up to 20 times the speed of sound and striking targets around the world in a matter of minutes.

After the merger, executives have said UTC could combine its propulsion technology, high-temperature materials and thermal and signal management systems with Raytheon’s missile developments in seekers, payloads and guidance and control systems.

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Eremenko said hypersonics now are the Pentagon’s “No. 1 priority” and Raytheon Technologies is poised to become a “true powerhouse” in supplying them.

Federal lawmakers have called hypersonic missiles a “game-changing” technology, with some pushing for the United States to quickly develop them, lest it fall behind manufacturers in countries such as China and Russia, the New York Times reported last month.

The Trump administration’s proposed defense budget for this year included $2.6 billion for hypersonic weapons.

“Hypersonics is potentially the next stealth in terms of survivability and in terms of the lethality of future weapon systems,” UTC’s Eremenko said. “And the reason for that is because the enemy kill chain is just not fast enough to neutralize a hypersonic weapon traveling at those speeds.”

Also possible, Eremenko said, is the development of an airborne directed-energy weapon system, using Raytheon’s high-energy lasers and microwaves and UTC’s power systems and adaptive military engines. Raytheon already has used the beam weapons during tests to shoot down drones from grounded vehicles.

On the commercial side, executives also highlighted innovation in the realm of the “next-generation connected airspace” as a plus of the merger. They said putting UTC’s air-to-ground networks and cockpit automation together with Raytheon’s terrestrial radar and cyber defense capabilities will result in more efficient and secure air traffic control operations.

The companies have said Raytheon Technologies will invest an annual $8 billion in research and development to support new products.

Who will lead the company?

Until the merger is finalized, UTC and Raytheon are set to continue operations as separate businesses, with no immediate changes planned for leadership or structure, according to the managers guide.

“The management structure will be evaluated during the integration process,” the guide continues.

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The merger agreement stipulates UTC’s Hayes will be named CEO of Raytheon Technologies. Kennedy is set to be appointed executive chairman of the new company for two years before Hayes succeeds him in that role as well.

Raytheon Technologies will have a 15-person board of directors, consisting of eight members from UTC and seven members, including the lead director, from Raytheon.

Are there any potential barriers?

President Donald Trump on June 9 said he is “a little concerned” about the deal, telling CNBC, “When I hear United and I hear Raytheon, when I hear that they’re merging, does that make it less competitive? It’s already not competitive.”

UTC and Raytheon executives say their products are complementary rather than competitive, with an overlap of less than 1 percent, and the two companies have not competed against each other on any single system in years.

Each companies’ shareholders also will need to approve the merger in separate votes, and two activist UTC investors so far have voiced opposition.

Bill Ackman, of hedge fund Pershing Square Capital Management, said in a June email to Hayes that he believes the deal “makes no sense” and would “significantly lower” the quality of the company’s aerospace business.

In late June, investor Daniel Loeb, CEO of Third Point LLC, wrote a letter to UTC’s board, calling the merger “ill-conceived” and alleging it was motivated by “empire building” rather than a focus on technology.

Though the two hedge funds combined own just 1.47 percent of UTC, Loeb said Third Point is “confident many of our fellow shareholders feel the same way.”

In a June 17 interview at the aviation industry’s Paris Air Show, Hayes told CNBC that the merger would give the companies scale to work on new technologies that they could not develop individually, and that this could help persuade shareholders.

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“The more we talk about the technology, the more they see the benefits, the easier this is going to be to convince people,” he said.

What happens next?

Beyond the shareholders, company executives need approval from multiple other entities, including regulators in the United States and the European Union, before Raytheon Technologies can be formed. However, executives said, they do not foresee pushback from an antitrust standpoint because of a lack of product overlap.

A Pentagon spokesman said last month it is reviewing the implications of the potential merger and will submit its views to the U.S. Department of Justice or the Federal Trade Commission, which have not yet indicated whether they will play a role in approval.

In 2018, UTC needed the green light from the Justice Department as well as Boeing before it could acquire Rockwell Collins.

The Rockwell deal required approval from 17 countries, including China, which is not among the 10 countries that now must sign off on the proposed merger, Hayes said in a June 10 interview with Bloomberg TV.

Under the merger agreement, UTC also must spin off its Otis elevator and Carrier air-conditioner businesses before it consummates the deal.

As it stands, last month, United Technologies named CEOs — Judy Marks and David Gitlin — for the respective businesses after they are established as stand-alone companies. Hayes said a team of over 600 people are working on the spinoffs, which remain on track.

“We truly believe that we’re going to get this done relatively quickly,” he said, adding that, with regulatory approval by the first quarter of 2020, UTC could execute the spinoffs and close the merger deal at the same time.

“And we don’t see any impediment to getting that done,” Hayes said.

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

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