M&A For Strategic Positioning in Precision Manufacturing: United Technologies and Rockwell Collins

Executive Summary

United Technology Corporation’s (UTC) offer for Rockwell Collins reflects UTC’s history of using merger and acquisition for strategic re-positioning. While expensive, a successful transaction should place UTC in an enviable market position among aerospace suppliers.

The Deal

On September 4^th, 2017 United Technologies Corporation (UTC), one of the world’s largest precision manufacturers, announced it would buy Rockwell Collins for $30 billion in cash, stock, and assumed debt. Some criticized the deal as too expensive and brought on by the threat of activist investors pressuring UTC management for better performance. A longer term look shows the Rockwell Collins deal is the latest action in a disciplined M&A strategy that should continue to refresh UTC’s prospects for decades to come. Precision manufacturers of all sizes can learn from UTC on how to effectively sell and buy businesses with an eye to long-term performance.

For some time UTC has faced complaints from shareholders for underperforming other industrial firms. There is some truth to the complaint:

Source: ChartIQ.

Since 2011, UTC shares lagged the broad market. Why? Lack of growth. The company, net of discontinued operations, grew revenues at a gentle 2.4% per year. Profitability similarly lagged, primarily due to the decline in US military spending. Three separate deals reflect UTC’s attempts to expand in the more desirable commercial aerospace markets.

Goodrich

In 2011 UTC acquired Goodrich for $18 billion. Out of the tire business for years, Goodrich’s $8 billion in annual sales come from landing systems, one of nine core technologies found in most aircraft. At the time of the deal, Wall Street pilloried UTC management for paying too much. Hindsight shows that, though expensive, Goodrich (now part of UTC Aerospace Systems) is a highly profitable contributor to UTC. So, a step in the right direction.

Sikorsky Sale

In 2015 UTC sold its iconic Sikorsky division to Lockheed Martin. Few argued this move. Sikorsky’s Blackhawk helicopter faced falling orders from the US and foreign militaries. Sikorsky sales had dropped from $6.8 billion in 2012 to $4.9 billion at the time of the deal. Operating profit percentage had rolled down from 10% to zero in the same period. The $9 billion received from Lockheed was used to reduce UTC’s debt load, increasing UTC’s dry powder for future acquisitions.

The sale of Sikorsky should be judged another step in the right direction by UTC management.

Rockwell Collins

The Rockwell Collins announcements marks another expensive but well-chosen strategic pivot. While most know $8.4 billion Rockwell Collins as an avionics company, Rockwell’s acquisition of B/E Aerospace moved the company into aircraft interiors and related systems. Two questions stand out:

• What is the strategic logic of the deal?
• At $30 billion did UTC offer too much to ever recoup value from Rockwell?

Let’s look at the questions separately.

Strategic Logic

The strategic logic of the deal is elegant. Facing pricing pressure from Boeing and Airbus as well as competition from General Electric UTC, in a single deal, becomes an integrated supplier of most things that go on an airplane. Consider UTC’s position pre- and post-merger:

While UTC offers products for all major systems, Rockwell expands their offerings from components to full systems in avionics and interiors. General Electric, Triumph, Spirit Aerosystems, and Honeywell compete with UTC but none can match this range of capabilities. When a company has presence on every major aircraft system it becomes harder for Boeing and Airbus to negotiate crippling costdowns.

Overpay?

While some analysts have complained UTC is overpaying for Rockwell Collins there is a counter-argument. In paying $23 billion for Rockwell Collin’s equity and assuming about $7 billion in debt UTC is paying about 14 times EBITDA for the Rockwell stock[1]. This multiple is in line with other major aerospace deals done in the 13 times range[2]. Given that this is likely to be a long-term acquisition, UTC can be accused of offering a premium price, but not unreasonable one.

It is also worth noting that other strategic aerospace deals, while pricey at the time, have been strategic and financial success stories:

• Boeing’s 1996 acquisition of McDonnell Douglas for $13.3 billion.
• Raytheon’s 1997 acquisition of Hughes Aircraft for $9.5 billion.
• Alcoa’s 2014 acquisition of Firth Rixson for $2.9 billion.
• The 2005 merger of Snecma and Sagem SA to form Safran.

For More Information

Please contact Tony Freeman at tfreeman@asfreeman.com or at (917) 868-0772.

[1] Michael J. de la Merced, Dealbook, The New York Times, September 5, 2017.

[2] Barbara Noverini, Morningstar Analysis Report, September 5, 2017.