Defence heavyweight Raytheon Co. plans to merge with United Technologies Corp. in a deal that would create the USA’s second-largest aerospace and defense company.
Raytheon and United Technologies, which is based in Farmington, Conn., said Sunday that they agreed to combine in an all-stock transaction, forming a company with about $74 billion in annual revenue, trailing only Boeing in the market for military and aerospace products and services.
If the deal is approved by shareholders and the federal government, the new company would have a stock market value of about $100 billion, almost double Raytheon’s current value, after United Technologies completes its planned spinoffs of its Otis elevator and Carrier building-services divisions.
The new partners billed the deal as a “merger of equals,” with the combined company to carry the blended name Raytheon Technologies Corp. But United Technologies, the larger of the two by revenue and market value, is clearly the more equal.
The Connecticut industrial conglomerate would have eight board seats, and Raytheon would get seven. United Technologies’ shareholders would own 57 percent of the new company, while Raytheon’s investors would control 43 percent. Raytheon shareholders would receive 2.3348 shares in the new company for every share they now own, a ratio that doesn’t provide any premium to its current stock price.
Gregory Hayes, the chief executive of United Technologies, would hold the same title at the merged company, while Raytheon CEO Thomas Kennedy would become executive chairman. Hayes would become chairman two years after the deal closes, which is expected in the first half of next year. That would be after Otis and Carrier become separate companies.
Raytheon Technologies would be based in the Boston area. Raytheon has 13,000 employees in the state at locations including Andover, Boston, Cambridge, Tewksbury, and Woburn, in addition to its Waltham headquarters. It has 67,000 employees worldwide, versus 240,000 at United Technologies (though that includes the Otis and Carrier divisions that will be spun off).
Tax policies in Massachusetts have been more favorable for businesses than in Connecticut, said Mark Gallagher, vice president at the Massachusetts High Technology Council. He noted former General Electric CEO Jeff Immelt cited taxes as a reason he wanted GE to move out of the Nutmeg State, before eventually deciding to relocate the company to Boston.
“Connecticut has made a lot of bad policy decisions in the last 10 to 15 years,” he said. “You’re seeing companies bleed out of that state.” Meanwhile, the Boston area has been a magnet for tech and other companies.
Defense and aerospace companies have been consolidating for years, and the US industry is now dominated by five players: Boeing, Lockheed Martin, Northrop Grumman, Raytheon, and General Dynamics. They have benefited from increased military spending by the United States and other countries and growing commercial aircraft sales.
The Raytheon-United Technologies deal will need US antitrust approval and a green light from the Pentagon. Since it would still leave the Defense Department with five big suppliers — and there is little overlap between Raytheon’s and United Technologies’ operations — it probably will not attract significant government resistance.
Raytheon, which generated 68 percent of its 2018 revenue from the US government, is seeking to spread risks over a more diversified collection of businesses and customers, reducing its reliance on defense contracts. It makes the Patriot missile defense system, Tomahawk cruise missiles, and a range of radar, laser, and cybersecurity systems. It also provides the electronic-tolling system used on the Massachusetts Turnpike and other roads around the world.
At United Technologies, Hayes is drastically remaking the company. Under pressure from investors, he proposed the spinoffs of Otis and Carrier. That leaves the aerospace business, anchored by its Pratt & Whitney jet engines, and other aviation components, including those made by Rockwell Collins, which Hayes bought last year for $23 billion. Raytheon puts Hayes deeper into defense contracting.
While cost-cutting isn’t a primary factor behind the deal, the companies expect significant savings: $1 billion annually by the fourth year after the closing. They also promised to return $18 billion to $20 billion of capital to shareholders in the first 36 months following completion of the merger through dividends and share buybacks.