United Technologies Closing In To Acquire Rockwell Collins For $140 A Share

United Technologies (NYSE: UTX) is all set to close a deal to acquire Rockwell Collins, in what has been dubbed the largest aeronautics acquisition ever. According to credible sources, UTC is expected to pay a purchase price of approximately $140 a share, bringing the takeout price to a little under $23 billion. Rockwell Collins had a market cap of about $19.3 billion before reports of a bid in early August. Despite the lack of news coming in from either company, we might hear more on the matter as early as this weekend.

With the signing of the deal, UTC is expected to benefit from operating synergies through lower costs, with more opportunities to cross sell the products. Such benefits are expected to make the company a significantly more important supplier of components to mammoth aircraft manufacturers like Boeing and Airbus, thereby increasing its bargaining power in the aerospace supplier market.

How Could Such A Deal Help United Tech?

There are two potentially important reasons why United Tech is poised to benefit greatly should the deal go through. Here’s why:

• The deal would enable significant cost savings for the company. Back in 2011, UTC purchased Goodrich – an aerospace manufacturer – for approximately $16.4 billion. At the time, the acquisition was successful in reducing costs by over $500 million, which represented a mammoth 7.5% of UTC’s annual operating costs before the acquisition. The deal with Rockwell Collins is expected to produce a similar result. If all goes to plan, United Tech is expected to see over $530 million in annual savings going forward.
• Further, in July, Boeing announced its intentions to set up a factory unit tasked with producing avionics and electronic systems; very similar to the products UTC and Rockwell make. Such a move was bound to hurt sales and operating margins at the major aeronautic suppliers. Hence, this deal could not come at a better time. A quick and decisive merger between the two companies could help UTC resist such pressures from larger competitors that have the potential to use their resources to grab large swaths of market share.

Despite the benefits, however, the deal carries certain risks. Airbus has issued the company a stern warning in this regard. In recent quarters, Pratt & Whitney has suffered significant problems and heavy costs at its Geared Turbofan (GTF) engines program. This, in turn, has led to notable delays in the engine’s delivery over the last year or so. These delays have greatly impacted sales at Airbus, with several airlines cancelling or deferring orders of the new and revolutionary A320neo single-aisle jet. The French airplane manufacturer is concerned that a deal of this magnitude could distract UTC from resolving the issues that plague operational efficiency at Pratt.

That said, at this point, the benefits greatly outweigh the risks. A deal such as this has the potential to turn things around for UTC that has only recently begun to recover from a tough business climate.

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