eyes on
Defense Giants Raytheon and United Technologies spin off key segments to gain merger approval: (thats a nice combo)
In order to clear the last holdup from the U.S. government, Raytheon agreed to divest its military airborne radio business, while United Technologies agreed to divest its GPS and space optical businesses.
On April 3, Raytheon (NYSE:RTN) and United Technologies (NYSE:UTX) successfully closed their merger after clearing the last regulatory hurdles the previous week. The merger will create a defense behemoth that generated $74 billion in revenues during 2019. The new company will be named Raytheon Technologies and will begin trading on April 3 under the stock symbol RTX.
Preceding the merger, United Technologies spun off its HVAC division Carrier (CARR) and its elevator division Otis (OTIS) into separate companies, both of which have been added to the S&P 500.
Raytheon Technologies
To complete the merger, each share of Raytheon was converted to 2.3348 shares of Raytheon Technologies, while each share of United Technologies was converted to one share of the combined company.
Raytheon is a major U.S. defense and industrial manufacturing company with its core operations in weapons and military and commercial electronics. After spinning of the necessary divisions, United Technologies brings its aerospace businesses to the combined company, including Collins Aerospace, one of the largest suppliers of aerospace and defense products in the world.
The new company will be led by United Technologies Chairman and CEO Greg Hayes and headquartered in Waltham, Massachusetts.
"Today, we introduce Raytheon Technologies as an innovation powerhouse that will deliver advanced technologies that push the boundaries of known science," Tom Kennedy, executive chairman of Raytheon Technologies, said. "Our platform-agnostic, diversified portfolio brings together the best of commercial and military technology, enabling the creation of new opportunities across aerospace and defense for decades to come."
United Technologies closed trading at $86.01 per share for a market cap of $74.50 billion, a price-earnings ratio of 13.42, an operating margin of 11.64% and a cash-debt ratio of 0.16, while Raytheon closed trading at $116.96 for a market cap of $116.96, a price-earnings ratio of 9.8, an operating margin of 16.36% and a cash-debt ratio of 0.79.
Over the first quarter of calendar 2020, Raytheon shares dropped 46%, while United Technologies shares were down 42%, resulting in the companies trading near or below their intrinsic value according to the discounted cash flow model and Peter Lynch earnings lines.
While the combined company will have the advantage of scale and complementary operations, which could help it gain more market share, there may not be much market share to gain in the immediate future. During times of economic crisis, governments typically cut spending on aerospace and defense contracts. Thus, declines in quarterly revenue may drive shares lower in the short term, despite the company's long-term value and current undervaluation.
Additionally, some analysts and investors hold that the low amount of cost-cutting synergies make the merger pointless from a shareholder perspective.
"Raytheon brings very little applicable technology to [United Technologies] aerospace offerings," Daniel Loeb (Trades, Portfolio) wrote in a letter to United Technologies' board in June of 2019. "The benefits of Raytheon's cyber and data analysis capabilities are not quantifiable and could be replicated through commercial collaboration or supply agreements."
In the letter, Loeb stated that Third Point planned to vote against the merger, though the firm only cut its holding in United Technologies by 13.22% and invested approximately $177 million in shares of Raytheon in the fourth quarter of 2019.
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https://finance.yahoo.com/news/raytheon-united-technologies-merge-create-221019169.html