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Does Reports of United Technologies Acquisition Herald Start of Major Defense M&A?

by: Matthew Potter
September 19, 2011

Category: Business Line, commercial aviation, Companies, development program, General Dynamics, Goodrich, ISR, IT, ITT Corporation, Lockheed Martin, logistics, Military Aviation, Northrop Grumman Corp., Pratt & Whitney, production program, Rockwell Collins, Sikorsky | RSS 2.0

Update — On 22 September United Technologies released a press release stating their intent to acquire Goodrich for an estimated price of $18.4 billion. This would be the largest defense and aerospace related acquisition in many years. The transaction will still take several months as it goes through regulatory review. The CEO of United Technologies stated “Goodrich delivers on all of our acquisition criteria. It is strategic to our core, has great technology and people, and strengthens our position in growth markets.”

Late last week various reports began to arise the United Technologies Corp. (UTX), a large and diverse company that among its products makes military helicopters and jet engines, was interested in acquiring either Goodrich Corp. (GR) or Rockwell Collins (COL). Both of these companies make aerospace components for military and commercial uses.

The cost of the deal would be quite high compared to other recent defense M&A. Somewhere in the neighborhood of $7 billion for Goodrich requiring United Technologies to borrow a large amount of the necessary capital. Last year Goodrich’s earnings were around $7 billion while United Technologies’ sales were about $54 billion. Rockwell’s most recent quarter showed $1.19 billion in sales.

All three companies make major components for civil and military aviation so they synergy of the acquisition is there. They also all have significant business with the U.S. Department of Defense and other militaries across the world. The move would also fit in with how United Technologies is organized as it keeps strict lines of business under separate former corporations such as Sikorsky Aircraft, Pratt & Whitney and Hamilton Sundstrand. Moving another company into the group would not be difficult.

To this point there have been some large M&A moves this year by large defense contractors. Both General Dynamics (GD) and Lockheed Martin (LMT) have acquired health technology companies recently with the GD move coming in at close to $1 billion. Northrop Grumman (NOC) also spun off their shipbuilding arm into a new company called Huntington Ingalls Industries (HII) rather then sell it but it still could be a target for acquisition.

This move by United Technologies though is much larger and seems to herald a return to the Nineties when medium and even large defense contractors were merged and acquired. This was due to the lack of demand from the U.S. compared to the decade previously and it is expected that U.S. defense spending will decline in the near future due to deficit issues and the reduction in combat in Afghanistan and Iraq. The Senate Appropriations Committee in their mark-up of 2012 spending froze it at 2011 levels which is a cut when compared to what the Administration requested of about $26 billion.

The acquisition also works well for United Technologies as both companies mentioned have a significant part of the civil aviation industry as it does itself. This will allow expansion there that would offset any decline in defense sales.

If this acquisition goes through it might start a chain of similar moves as defense contractors begin to adjust to the new market and parts are jettisoned or added. ITT Corporation just broke off its former defense business into a new company called ITT Exelis. This might be a target for acquisition as it should be similar to the $7 billion in price for Goodrich.

If the United Technologies deal does happen it might be what the defense industry needs to push companies to make decisions about larger M&A that could lead to market contraction similar to the Nineties. Although the Defense Department has made clear that they do not want any of the larger defense contractors merging with each other.

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