How Can The Deal With Rockwell Collins Benefit United Technologies?

In September, United Technologies (NYSE: UTX) managed to close the much awaited acquisition deal with aircraft parts manufacturer Rockwell Collins for nearly $30 billion, which includes $7 billion in net debt. The deal enables UTC to benefit from several operating synergies through lower costs, with more opportunities to cross-sell each company’s 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.

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. The combined company, Collins Aviation, is expected to have annual revenues of close to $62 billion, which is not too far off from Airbus at $80 billion and Boeing at $96 billion.

All in all, a deal such as this has the potential to turn things around for UTC, which has seen a modest recovery from a tough business climate.

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