President Trump on Monday morning in an interview on CNBC raised anti-competitive concerns with the proposed merger between United Technologies Corp. [UTX] and Raytheon [RTN], but company executives said on an investor call there is barely any overlap in their portfolios and foresee relatively swift regulatory approvals.
“When I hear they’re merging, does that take away more competition,” Trump asked on CNBC’s “Squawk Box” before the opening of the markets on Monday morning. “It becomes one big fat beautiful company but I have to negotiate, meaning the United States has to buy things and does that make it less competitive? Because it’s already non-competitive.”
Trump compared U.S. spending on defense with Russia and China, which spend about $68 billion and around $200 billion to $250 billion respectively each year, noting the U.S. easily outspends these countries “many times that, and part of it is we spend so much money, and part of it is we have no competition. We really don’t. We don’t have competition.” He told CNBC’s Joe Kernen that the U.S. defense industry has already consolidated—mentioning Boeing [BA] and Lockheed Martin [LMT]—to the point that “it’s hard to negotiate when you have two companies and sometimes you get one bid.”
Trump said he has been involved in negotiating defense deals with, saying “I got the plane costs down a lot,” likely referring to the F-35 Joint Strike Fighter. Before becoming president in January 2017, Trump assailed the cost of the F-35 and has claimed credit since for lowering the unit cost of each aircraft, even though the declining costs in the program are on track with projections that prime contractor Lockheed Martin has made for years.
The pending merger of United Technologies and Raytheon into a new global aerospace and defense giant with around $74 billion in sales was announced on Sunday, but despite the size of both companies, there is very little overlap between them.
Greg Hayes, UTC’s chairman and CEO, who will become CEO of Raytheon Technologies if the merger goes through, said on the call that out of between $75 billion to $80 billion in combined sales, “less than 1 percent of our sales probably have overlap. This is truly a complementary deal from the technology standpoint, from a product standpoint.”
Hayes also said “We don’t see big push back from DoD. In fact, they will see huge benefits from this as will all of our customers.”
Capital Alpha Partners aerospace and defense analyst Byron Callan in a client note late Monday morning said his firm doesn’t see Trump’s comments as “impactful” relating to the merger of UTC and Raytheon, highlighting that the companies don’t sell the same products.
In a research note on Sunday ahead of the official merger announcement, Callan pointed out that there is some overlap between the two companies in defense communications and imaging and infrared products, and he noted that there may be some work both companies do military satellites, but this is difficult to know given that Raytheon’s work here is classified. The instances of overlap may require “small divestitures,” he said.
Hayes is hopeful the deal can close by the end of the first quarter of 2020.
Pentagon spokesman Lt. Col. Mike Andrews said in a statement for media that the DoD Acquisition Chief Ellen Lord is discussing with Raytheon and UTC the “implications and governance” of the proposed merger.
“We look forward to working with Raytheon Technologies Corps. to provide the best capabilities our warfighters deserve, at the greatest value to the taxpayer,” he said.
Benefits to DoD
Company officials on the investor call also stressed that the merger will create cost savings synergies that have to be passed onto the government as well as technology synergies that will help the Defense Department on its modernization priorities.
When the two companies announced their proposed merger on Sunday, they said by year four of operating as Raytheon Technologies the combined business will generate around $1 billion in annual cost savings synergies. Tom Kennedy, chairman and CEO of Raytheon, said on the investor call that these savings amount to around $500 annually for its customers, who will benefit from lower rates and lower costs on cost-plus contracts.
Kennedy also touted the technology benefits to the Defense Department that will help with its modernization priorities.
“And then the other big area that I believe they’re going to be excited about is the complementary technologies we have,” he said. “You know, we constantly hear about the DoD wanting to go to Silicon Valley for the commercial technology. Well, they don’t have to go to Silicon Valley anymore. We have that technology with these combined companies. It’s very complementary technology. We’re applying that technology in the commercial world. We’re applying that technology in the defense world. And so, they’re going to have the best of the best.”
Complementary Technical Areas
The slide deck used in the investor presentation highlighted six areas where the respective complementary technologies of the two companies will help their domestic and commercial customers.
The companies also highlighted complementary capabilities in directed energy weapons, and intelligence, surveillance and reconnaissance in contested environments. In the commercial space, they pointed to complementary capabilities in cyber security for connected aircraft, the next generation of connected airspace, and advanced analytics and artificial intelligence for aviation.
“These are just a few of the advanced solutions we envision bringing to the market,” Kennedy said in his prepared remarks at the outset of the presentation. “The bottom line is that we expect to deliver significant value to our customers through the quality and innovation of our products and cost-effectiveness of our systems.”
The companies also expect revenue synergies from the merger but didn’t quantify any.
Hayes said less than 10 jurisdictions worldwide will have to approve the transaction, including the U.S. and European Union. No approvals are needed by China, he said.
Later Monday morning, on CNBC’s “Squawk on the Street” program, Hayes and Kennedy appeared together and further refuted the notion that the merger of their companies is anti-competitive. Hayes said they would be speaking to Trump later in the day and that “once he understands the benefits of this merger” in terms of cost cutting and technology for the government, as well as job creation, “I think he’s gong to be supportive as he has been for both of the companies over his administration.”
Kennedy said, “I don’t remember the last time we competed against United Technologies. We do partner with them.” He pointed out that between the companies they have $8 billion to spend on research and development and employ 60,000 engineers.
Integration of the two companies will primarily be at the corporate level as UTC’s aerospace segments, Collins Aerospace and Pratt & Whitney, will continue to operate under Raytheon Technologies. Raytheon will consolidate its Intelligence, Information and Services, Space and Airborne Systems, and Forcepoint cyber security segments into one segment, and its Integrated Defense Systems, and Missile Systems segments into another segment. Hayes said the companies will look at taking UTC’s mission systems business and see how they can be “spread across” parts of Raytheon.
“This is, I would say, almost an integration light type of merger,” Hayes said.