4 questions that strike the Raytheon-United Technologies agreement to create a defense war
Thomas A. Kennedy, Raytheon's CEO, sounded like he was selling the company's proposed merger with United Technologies, not as good for the shareholders, but as a patriotic attempt.
"This is all over a great game for United States, which makes us a better country, a much stronger country and a country built on noble jobs," said Mr. Kennedy at CNBC at Monday, "It's a win-win for everyone."
The grandiose sales should not come as a surprise.
The deal coincides with the queer questions of many legislators and regulators on the economic benefits and costs of large mergers. President Trump, who has opposed some major corporate agreements, said he was "a little worried" for Raytheon-United Technologies merger to increase the cost of military hardware.
The combined company, Raytheon Technologies, would be a defense and spaceflight with annual sales of nearly $ 75 billion, more than either Lockheed Martin or Airbus posted last year, combining Raytheon's rocket and 19459005 and radar systems with United Technologies & # 39; jetmo commercial and military aircraft, including F-35 fighter.
Here are some great questions and issues the companies must bring with them when seeking approval from government officials and shareholders.
How would the merger benefit the corporate customers?
Raytheon and United Technologies said the merger would help them slash costs and transfer $ 500 million in savings to buyers of their products, mainly the defense ministry.
The companies said the overall company could save more than $ 350 million a year just by reducing what they spent on parts and raw materials. But Gregory Sanders a deputy head of the Center for Strategic and International Studies in Washington, said that technological advances in the defense sector often occurred to smaller suppliers to larger corporations.
"It's one of the areas where you're worried about innovation," he said.
The company's executives claim that the overall entity would have scope and financial resources to increase research and development spending.
But it is not clear that Raytheon Technologies would invest more money in research than the total number of the two individual companies, which Mr. Kennedy seemed to recognize in a conversation with analysts on Monday.
"It depends on what the programs we invest in," he said in response to a question of spending level.
How should shareholders pay?
Managers said the overall company would return as much as $ 20 billion to shareholders through dividends and share purchases in the three years after the merger was completed.
However, investors seem to have doubts about the agreement. Shares in United Technologies, whose shareholders will own about 57 percent of the merged company, have fallen 7 percent since the merger was announced. Raytheon's shares are down 4.5 percent.
William A. Ackman CEO of Pershing Square Capital Management, a hedge fund, asked the benefits of the merger in an email to CEO of United Technologies, Gregory J. Hayes . Mr. Ackman wrote that United Technologies lacked "the ability to effectively supervise Raytheon's businesses, and in attempting to do so, it will lose focus", according to a person who saw the email.
Prior to the announcement, United Technologies split into three companies: an aviation division, which would merge with Raytheon; Otis, which makes lifts and escalators;
Why do companies coincide now?
Raytheon and United Technologies can position themselves for a decline or reversal in a current increase in US military and commercial airline spending. Three times in the announcement, the companies say the merger would help the new company operate through the "business cycle", meaning good time and bad.
Some economists believe that a large increase in mergers and acquisitions may indicate an extension may end. Businesses can be more likely to seek partners when they struggle to increase profits and sales.
So far this year, businesses have announced mergers and acquisitions totaling $ 1 trillion, an increase of 14 percent from the same period last year, according to data from Dealogic .
"What consolidation does it, as it is about M&A, removes a source of competition, and it's a great way to improve your pricing position," David Rosenberg chief economist at Gluskin Sheff, a investment firm based in Toronto.
Is Mr. Trump eligible to worry about the deal?
The companies claim that because they are not currently in the same business, the merger will not increase the overall firm's market position in e.g. jet engines or missiles. Only 1 percent of the companies' sales overlap, Mr. Hayes said Monday at CNBC.
"There is nothing competitive about bringing these companies together," he said.
But antitrust experts say that Trump has the right to be concerned.
Offers involving businesses closely related to one another can strengthen the overall market power of the company. Raytheon and United Technologies have suggested that the deal will create "highly complementary technology offerings", which critics of large mergers consider to be a red flag.
"They could use the improved footprint and increased market power to make it more difficult for their rivals to compete," Diana L. Moss president of the American Antitrust Institute, a Washington group speaking for stronger handling of antitrust. "I think Rolls-Royce, a rival, would be a bit agitated."
United Technologies and Raytheon will probably need to convince the Pentagon that a merger will not reduce incentives to provide the most advanced and affordable technologies. The Ministry of Defense has blocked some previous mergers – including Lockheed Martins proposed acquisition of Northrop Grumman in the late 1990s – after the conclusion that the agreements threatened the competition.
The government's main concern is that there is sufficient innovation in the defense sector to design and manufacture new weapon systems, William Kovacic said a professor at George Washington University Law School and a former head of the Federal Trade Commission.
"Any shrinkage in the number of these enterprises should be a matter of concern for the defense agencies and for state antitrust agencies," he said.
