What Are The Main Concerns Regarding The United Tech-Rockwell Collins Deal?

by Trefis Team
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The acquisition deal between United Technologies (NYSE: UTX) and Rockwell Collins, for a whopping $3o billion, is being dubbed the biggest deal in aviation history. Should it go through, the deal is expected to benefit UTC greatly. However, ever since its announcement, there have been many concerns raised by investors and customers alike. While investors believe that they aren’t being provided with adequate information about the deal, customers believe that the combined company, Collins Aviation, would become a monopoly capable of hurting the balance in the aviation market.

The Investor’s Side:

Last week, lawyers filed the sixth shareholder suit in the U.S. District Court in Cedar Rapids. Much like the earlier suits, it does not ask for the court to overturn the proposed merger. Instead, it claims that both companies have left investors in the dark. Shareholders feel like the companies have not provided them with enough information to make an informed decision about the deal.

Per the agreement, each Rockwell Collins shareholder will get about $93.33 per share in cash, and the remainder in UTC common stock. United Tech hopes to fund the cash portion of the transaction partially through debt and the balance through cash on hand. And that’s where the information ends according to investors.

While United Tech has not replied to these claims yet, investors hope that management takes note of their concerns and gives them an answer before the official vote, which is expected to take place sometime in January.

The Customer’s Side:

The commercial aircraft market was facing a terrible slump over the last few quarters. Additionally, airplane makers have had to incur significant development costs in the same period, putting immense pressure on Boeing and Airbus’ profits. While plane manufacturers have struggled to maintain a low 9% profit margin, suppliers like UTC and Rockwell have made profit margins between 14-17%.

Because of the dismal commercial market and rising pressure from investors, both Airbus and Boeing tried to adopt a more aggressive stance towards suppliers. In essence, this meant, trying to bully the suppliers into offering much lower prices today, in return for future contracts. However, that is not all.

By allowing other ancillary companies to produce some of the more complex parts in their aircraft, both companies have given away their right to capitalize on a highly lucrative market – the servicing of airplanes for airlines globally. To put this into perspective, Rolls Royce, the British engine supplier, makes close to one-half of its sales and all of its profits from servicing engines.

Hence, both Boeing and its French counterpart decided that it is time to take this market back by making more parts in-house. In this respect, in July, Boeing announced its plans to open up a facility which manufactures various kinds of avionics and other electrical systems, while Airbus continues to cut short its list of suppliers and do more of its own work. And this is where the problem lies.

The combined company, Collins Aviation, is expected to have annual revenues of close to $62 billion, which is not too far off Airbus at $80 billion and Boeing at $96 billion. Therefore, it seems only logical that the airplane manufacturers would feel threatened by the acquisition, which forms a monopoly at the supplier end, consequently giving the combined company a much higher bargaining power, while hurting their chances of being successful in their respective new ventures.

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