Loren Thompson
United Technologies Chairman & CEO Greg Hayes remarked over the weekend that the proposed combination of his realigned company with Raytheon will define the future of aerospace and defense.
He certainly got that right. Raytheon Technologies Corporation, as the combination would be called, will be a leading innovator in aircraft propulsion, commercial and military avionics, digital communications, sensors tailored to diverse warfighting domains and cybersecurity solutions. In fact, it may claim the same “national champion” status in civil and military electronics that Boeing currently occupies in commercial aviation.
But Raytheon Technologies isn’t just about the future. It would also be about the past, subsuming many of the enterprises that have made America the world’s leading aerospace power. The best-known of these enterprises trace their history back nearly a century, to the dawn of the modern era.
For instance, Raytheon was founded in the shadows of MIT in 1922, and played a pivotal role in bringing radio into American households. Iconic engine innovator Pratt & Whitney completed its first engine (the Wasp) on Christmas Eve in 1925. Collins Radio was founded in 1933. All three were crucial to the Allied war effort during World War Two, and then became important participants in the jet age that dawned at the war’s end.
This picture of an Air Force KC-46A tanker refueling a B-2 bomber in April illustrates how diverse the products of a Raytheon-United Technologies combination would be. It could provide the engines, the avionics, the sensors, the displays, the communication systems, the fuel systems, the hydraulic systems, the munitions and even the cybersecurity software required by the two planes.WIKIPEDIA
Much the same applies to Goodrich, Hamilton Standard and Sundstrand, the other big corporate antecedents of what United Technologies now calls Collins Aerospace. And Raytheon’s portfolio of products—missiles, radars, etc.—was reshaped by the acquisition of Hughes Electronics defense lines in 1997. The contributions of Howard Hughes to U.S. aerospace, including construction of what is now the world’s biggest missile factory, need no introduction. So a great deal of history is wrapped up in the various parts of the proposed Raytheon Technologies Corporation.
Against that backdrop, it is remarkable how little overlap there would be in the diverse product lines of what looks to be a $70 billion enterprise at its inception. The company would have a huge footprint in commercial, civil and military aerospace markets around the world, but the impact of merging on competition in each market segment would be surprisingly modest. Raytheon Chairman & CEO Dr. Tom Kennedy remarked to me this morning that he can’t recall the last time his company and United Technologies competed against each other for a contract.
It is this feature of the deal that has led several observers to predict the Department of Defense will have little objection to the transaction. Once the deal is consummated, military customers will still have just as many options in buying jet engines, communications networks, smart munitions and advanced sensors as they did before the merger occurred. The size of the resulting enterprise won’t matter much to regulators if the impact on competition in the marketplace is minimal.
In fact, the combination might actually bolster competition by enabling the continuation of advanced research during downturns in demand. The reason is that while both commercial and military aerospace markets are cyclical, the cycles seldom coincide. When defense demand is up, as after 9-11, commercial demand is often down—and vice-versa. That is why investors sometimes describe defense holdings as “counter-cyclical.” Raytheon Technologies Corporation would be able to move resources back and forth between defense and non-defense businesses in order to keep internal R&D going, regardless of how demand is trending because of its diverse sources of revenue.
Boeing has been on this model since 1997, when it combined the predominantly military lines of McDonnell Douglas with the predominantly commercial lines of legacy Boeing. Since that merger occurred, the company has never experienced the kind of severe downturns it saw when it was concentrated in one segment of the aerospace industry. (Boeing, like Raytheon and United Technologies, contributes to my think tank.)
This matters a lot to the engineer-driven cultures of business units like Pratt & Whitney, which have been known to spend billions of dollars in company funds over decades developing breakthrough innovations such as the geared turbofan. Raytheon spent many years becoming the leading innovator in gallium nitride chips for defense applications, an investment of time and money that has enabled big wins for the company in radar and electronic warfare competitions. Having the financial resources and resilience to continue such initiatives even when demand is soft can be crucial to staying ahead in the race for competitive excellence.
Thus, the two companies are correct in asserting that their cultures are complementary rather than competitive. They don’t compete in any major market segment, and yet their business focus and competencies are similar. Collectively they would share 38,000 active patents and a workforce of 60,000 engineers, all of whom are focused on the aerospace and defense business. Moreover, both companies are “platform agnostic” in their offerings, meaning that their engines, radars, avionics and cyber solutions can be plugged into a wide array of airframes and combat systems.
So despite the diversity of products in the combination, Raytheon Technologies Corporation would be nobody’s idea of a conglomerate. It would be a real big aerospace and defense company, period. Greg Hayes has been on this vector for years, which is why Otis and Carrier were being spun off from United Technologies long before the prospect of a merger with Raytheon materialized. Raytheon long ago jettisoned its non-defense lines in pursuit of a similar vision.
Combining the two companies makes so much sense that announcement of the merger shouldn’t have surprised Wall Street the way it did. The financial and functional synergies of a combination are obvious. The fact this can be accomplished without diminishing competition in the addressed markets underscores how unusual, in fact unique, the proposed deal is.
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