By Doug Cameron and Ben Kesling
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (June 12, 2019).
A merger that would be the aerospace-and-defense industry's
biggest ever caps two years of deal making in a sector that is
reorganizing in anticipation of slower growth in Pentagon spending
and new priorities such as space systems and hypersonic
missiles.
United Technologies Inc. and Raytheon Co. would be the
third-biggest aerospace-and-defense company by sales after Boeing
Co. and Airbus SE. Those companies along with Lockheed Martin
Corp., Northrop Grumman Corp., General Dynamics Corp. and the U.S.
arm of BAE Systems PLC dominate a defense industry in which some 50
companies vied for big contracts 30 years ago.
Cuts to U.S. military spending also contributed to an estimated
17,000 U.S. firms leaving the industry between 2001 and 2015,
according to a study by the Center for Strategic and International
Studies, a think tank.
The Pentagon has streamlined military operations in ways that
have left less room for multiple contractors. Lockheed Martin's
F-35 jet fighter, for instance, is meant to replace multiple other
types of aircraft. That has contributed to the U.S. aerospace
industry shrinking to three plane makers versus a dozen just
decades ago. Similarly, there are only two big shipbuilders,
General Dynamics and Huntington Ingalls Industries. At most three
companies typically submit bids for most big defense contracts.
Pierre Chao, a defense consultant at Renaissance Strategic
Advisors, said policy makers shouldn't be surprised that the
industry has consolidated as the number of new weapons systems has
shrunk.
"We've let market forces create the 'bigs,' " he said.
But Pentagon and antitrust officials have also discouraged
further mergers among the remaining companies that attract the bulk
of military spending. Pentagon officials have expressed concern
that bigger companies wield so much clout that investment decisions
can be distorted.
The combination of United Technologies and Raytheon is likely in
bounds because the companies make lines of products that don't
overlap, analysts said.
"I feel this proposed merger is right at the line of what would
be allowable," said Andrew Hunter, a senior fellow at the Center
for Strategic and International Studies.
President Trump said in an interview with CNBC on Monday that he
was worried the merger would decrease competition in the defense
industry. Analysts saw room in his remarks for United Technologies
and Raytheon to make a case that their businesses don't overlap in
a way that would give them too much control of the sector.
"He expressed concern 'if they have the same products,' " said
Capital Alpha Partners LLC analyst Byron Callan. "They don't."
William Ackman, a big United Technologies shareholder who
earlier pushed the company to streamline its business, urged United
Technologies to call off its merger with Raytheon, which he said
makes no strategic sense. Mr. Ackman sent an email to United
Technologies Chief Executive Greg Hayes Sunday morning saying he
was "extremely concerned" about the combination.
Raytheon Technologies, as the new company would be called, would
be a top supplier of systems such as engines and radars for the
F-35 combat jet. Executives at United Technologies and Raytheon
said in a call with investors on Monday that the merger would
create cost savings that will lower prices for those systems and
allow for investments in updated capabilities.
The executives said they have yet to brief the Defense
Department on their plans for the merger, which would be the
industry's largest ever by market value. A department spokesman
said Ellen Lord, the Pentagon's chief weapons buyer, would speak to
defense executives about the implications of the merger.
Ms. Lord has encouraged companies to take on more risk and
invest more money in developing new weapons systems. The Trump
administration is also addressing concerns that the U.S. has become
overreliant on foreign suppliers because so many domestic companies
have exited defense.
The department hasn't challenged a big industry deal since
Lockheed Martin bought the Sikorsky helicopter business from United
Technologies in 2014. The deal prompted the Pentagon to consider
adding national security concerns when reviewing proposed mergers
and acquisitions on competition grounds.
Frank Kendall, the Pentagon's chief weapons buyer at the time
and a former Raytheon executive, ultimately approved the deal
because Lockheed Martin didn't produce rival helicopters.
But he warned that further consolidation could hurt innovation,
constrict the supplier base and cost taxpayers more.
Northrop Grumman last year acquired Orbital ATK Inc., a maker of
missile engines and space rockets. General Dynamics acquired CSRA
Inc. to bulk up its information-technology offerings as the
Pentagon migrates more systems to the cloud. And Harris Corp. and
L3 Technologies Inc. are this month expected to close a merger that
will create the seventh-largest defense company.
Boeing has been a vocal opponent of recent industry
consolidation, with CEO Dennis Muilenburg questioning both
Honeywell's effort to merge with United Technologies and the
latter's purchase of Rockwell Inc.
Boeing has been pressuring suppliers to cut costs, though
creation of ever-larger competitors has reduced its negotiating
clout. The new merger could add pressure to Boeing, analysts
said.
"They've gone from suppliers," said Richard Aboulafia at Teal
Group LLC, an industry consultant, "to a near-peer company in size
and outlook."
Boeing said it would "review" the proposed combination. "Our
interests are in adding value to our customers and in ensuring the
long-term health and competitiveness of the aerospace industry and
of our supply chain," a spokesman said.
"I understand the realities of business and what's driving these
consolidations," said Chuck Hagel, defense secretary from 2013 to
2015. But he added: "The concern I have, from a defense and
security standpoint, is you're having to rely on fewer and fewer
options and companies." The United Technologies-Raytheon merger
provides economies of scale that could help drive down prices for
consumers, he said, something that becomes important as weapons
systems across the board become more complex and more expensive.
And while it will likely be scrutinized, he said he doesn't see the
merger being blocked.
Write to Doug Cameron at doug.cameron@wsj.com and Ben Kesling at
benjamin.kesling@wsj.com
(END) Dow Jones Newswires
June 12, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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