CEO-to-CEO call paved the way for UTC-Raytheon deal

'On our radar screen forever'

Greg Hayes

United Technologies Corp.
Greg Hayes United Technologies Corp.

When Greg Hayes took the reins at United Technologies Corp. in late 2014, the newly minted CEO said he would pursue huge deals to reshape the industrial conglomerate.

He’s been true to his word, though it took some pressure from activist investors to hasten the company’s transformation.

Since late last year, he has completed the acquisition of Cedar Rapids-based Rockwell Collins and announced plans to spin off the Otis elevator division and Carrier air-conditioner business as he narrows the focus largely to commercial aviation.

But it was an inbound call in the middle of last year that set him on course for his biggest deal yet. That’s when Thomas Kennedy, Hayes’ counterpart at defense contractor Raytheon Co., based in Waltham, Mass., phoned to suggest that the companies join forces.

A combination would give rise to an aerospace and defense powerhouse, the executives envisioned, with complementary product lines and fairly little overlap.

“This had been on our radar screen forever,” Hayes said Monday on a joint conference call with Kennedy. “So the compelling logic was there.”

The discussions resulted in one of the industry’s biggest deals ever, forming a manufacturer with about $70 billion in sales and a product lineup ranging from jet engines to missiles, and cockpit electronics to cybersecurity services.


UTC shareholders will own 57 percent of the new Raytheon Technologies Corp. when the deal closes in mid-2020.

The company is expected to be worth well over $100 billion. It would be the third-largest aerospace company behind Boeing and Airbus.

The tie-up, which the companies billed as a merger of equals, will give UTC a hedge against the cycles of the aviation markets, Hayes said.

That’s important as the company spins off its elevator and climate-controls businesses.

“A leading economic rationale behind the merger was that the resulting company would be far more resilient across business cycles due to its breadth and diversification,” said Nicholas Heymann, an analyst with William Blair and Co.

The deal will transform Farmington, Conn.-based UTC from a smaller defense contractor into one of the biggest. About 54 percent of the new entity’s sales will be from defense, the companies said.

The new corporation will be headquartered in Boston.

Approval is no sure thing. President Donald Trump has said he would be concerned about the combination if there is overlap in the companies’ offerings.

“When I hear they’re merging, does that take away more competition?” Trump said in an interview on CNBC. “It’s hard to negotiate when you have two companies and sometimes only one bid.”

But the companies don’t compete directly with each other much, which “suggests limited regulatory resistance,” Cowen analyst Cai von Rumohr said in a note.


Regulatory approval was a stumbling block in UTC’s ultimately successful acquisition last year of Rockwell Collins for $23 billion, plus $7 billion in debt.

UTC makes both commercial and military engines, while Raytheon is focused most on defense. On the contracting side, the deal will combine F-35 fighter jet engines made by Pratt and Whitney, a UTC division, with Raytheon’s Patriot missile-defense products and expertise in areas such as radars and munitions.

The headquarters will be in the Boston area.

A mix of businesses

The Raytheon transaction crowns a flurry of deal making by Hayes. In 2015, he agreed to sell the Sikorsky helicopter business to Lockheed Martin. The next year, he foiled a takeover bid from Honeywell International.

Then UTC agreed in 2017 to buy Rockwell Collins, a maker of flight computers and other aircraft parts, closing the deal in late November.

As other conglomerates faced pressure from activist investors to narrow their focus, Hayes argued in 2017 that UTC benefited from its mix of businesses.

He changed his tone last year as the Rockwell Collins deal advanced toward approval and two high-profile activists — Bill Ackman of Pershing Square Capital Management and Third Point’s Dan Loeb — revealed stakes in UTC and stepped up calls for a breakup.

Hayes announced plans to separate Otis and Carrier at the same time as the Rockwell Collins acquisition was secured.

After the Raytheon tie-up, the resulting company will have combined debt of about $26 billion, with about $24 billion of that coming from UTC, the companies said in a statement.

There is no change to the 2019 financial outlook for either company.


The companies said they expect to return $18 billion to $20 billion to shareholders in the first 36 months after the merger and to see about $1 billion in annual cost savings by the fourth year.

Greater heft would enhance the ability of UTC to withstand cost pressures from customers such as Boeing and Airbus, said Douglas Rothacker, an analyst at Bloomberg Intelligence.

“Aerospace suppliers have been, and will continue to be, under immense pressure from Boeing and Airbus to cut costs,” he said.

“We’ve seen consolidation in the sector as a way to counter these pricing and competitive pressures, and also to diversify to add revenue streams.”

Give us feedback

We value your trust and work hard to provide fair, accurate coverage. If you have found an error or omission in our reporting, tell us here.

Or if you have a story idea we should look into? Tell us here.

Give us feedback

We value your trust and work hard to provide fair, accurate coverage. If you have found an error or omission in our reporting, tell us here.

Or if you have a story idea we should look into? Tell us here.