WASHINGTON — United Technologies Corp. is reportedly nearing a more than $20 billion deal to buy Rockwell Collins, a merger of two major defense firms that experts said would make UTC an even more dominant supplier in the aerospace business.
Company executives expect to finalize UTC’s purchase of Rockwell Collins as early as this weekend, according to an Aug. 29 report by The Wall Street Journal, which broke the news of the impending sale. Sources quoted in the story said the deal is valued at more than $20 billion, but that amount could change as negotiations continue throughout the week.
Analysts told Defense News that the merger is probably motivated by hopes of growing the companies’ commercial business — particularly in the aftermarket — but that doesn’t mean the defense industry will remain unchanged.
Both UTC and Rockwell are defense industry heavyweights, and the consolidation of the two firms could set off a wave of similar acquisitions as other companies might seek to round out their own businesses by purchasing some of Rockwell’s competitors, analysts told Defense News.
“The usual trend is that when one big deal like this occurs, others follow because the first-tier competitors see a need to balance their portfolios in the same way that the first company did,” said Loren Thompson, a Lexington Institute analyst with close ties to industry.
Thompson believes that primes like Boeing, which has long indicated its interest in the aftermarket, could begin absorbing smaller avionics and electronics companies. However, Richard Aboulafia, an aerospace analyst with the Teal Group, said Honeywell is the most likely candidate.
“Seventeen years ago, [General Electric] and Honeywell were going to merge, and it was stopped by the European antitrust authorities. They could revisit that in light of the merger. It’s quite conceivable,” Aboulafia said in an Aug. 29 interview with Defense News.
“And there’s been talk of Honeywell spinning off aerospace, which might make the whole thing more palatable. Honeywell Aerospace joins somebody else,” he added. “I would think this would put pressure on Honeywell to maybe do something.”
Industry analysts agreed that the Pentagon and other government agencies would likely allow UTC’s acquisition of Rockwell Collins to proceed without objection because neither are competitive in the same market space.
Spokesmen for both companies declined to comment on this story.
United Technologies — which nabbed the No. 12 spot on the 2017 Defense News top 100 list — manufactures aircraft parts such as landing gear and propellers and, as the owner of Pratt & Whitney, is one of the two largest producers of military aircraft engines. Rockwell Collins, which held steady at No. 40 on the list, specializes in communications equipment, displays and avionics for the defense and commercial aerospace sectors.
“This [acquisition] does not raise very many antitrust issues because it really fills out a portfolio in areas where UTC was not previously well established,” Thompson said. “Rockwell began as a radio company, and a large part of its business is concentrated in areas where United Technologies does not have extensive franchises.”
However, commercial aircraft manufacturers like Airbus and Boeing might be worried about how the consolidation in their supply chain affects their bottom line, said Byron Callan of Capital Alpha Partners.
“This isn’t a case where you can say Rockwell Collins was lagging; they needed an influx of capital or talent,” he said.
While the acquisition wouldn’t lead to a major loss in competition, it could make it more difficult for manufacturers like Thales or Harris Corp. to go up against a more powerful Rockwell Collins with the resources of UTC at its disposal, Thompson said.
Aboulafia concurred that a UTC-Rockwell Collins conglomerate would have “the economic wherewithal to be aggressive in contracts” with the funds necessary to absorb upfront losses and develop products.
However, it’s not a given that the deal would necessarily fortify Rockwell Collins in the government marketspace. Todd Harrison of the Center for Strategic and International Studies noted that UTC is obviously looking to expand its reach into the commercial aircraft supply market, and may have less interest in using Rockwell to grow its defense business.
“Over the past few years UTC has shown less interest in defense, as illustrated by its sale of Sikorsky to Lockheed,” he said. ”So it would not be terribly surprising if UTC were to buy Rockwell Collins and then sell or spin off the government side of the business.”
Callan’s appraisal of the potential UTC-Rockwell Collins merger was more conservative than many of his colleagues.
“I don’t think that it’s going to trigger a domino effect where United Technologies has bought Rockwell Collins so that means that GE now has to go out and buy Thales and Safran and Honeywell have to merge or something like that,” he said, adding that the acquisition would probably only have minor effects on the defense industry landscape.
One of those could include rekindling Defense Department efforts to clamp down on what kinds of products are designated as “commercial items,” he said. Once a product is labeled as commercial, a company can sell it at the market rate to the military without having to provide detailed financial data about how much it costs to manufacture it — a practice that allows manufacturers of commercial items to reap higher profit margins, even on defense deals.
“Rockwell Collins gets these margins in their government services businesses because they do sell a lot of stuff basically on a commercial basis to the Department of Defense,” Callan said. “Is that something that maybe gets a fresher look? I think there’s just going to be a natural wariness, the bigger a contractor is. Are they going to have more leverage?”
This story was updated on Aug. 30, 2017, with comments from Todd Harrison.