The argument for combining disparate businesses under a corporate umbrella may seem compelling. Operations exposed to a variety of markets buffer a parent company from boom-bust cycles. While industry-expert leaders of the subsidiaries get on with running their businesses, professional managers in head office look after strategy, with access to far greater financial resources.
But conglomerates have long been out of fashion. Investors prefer to do their own diversification by owning shares in companies of their choosing, believing – reasonably – that focused businesses perform better.
Big name conglomerates heavily exposed to aerospace have included ITT, Textron and GE – all of which have to varying degrees consolidated in recent years. One of the last to enthusiastically fly the conglomerate flag is United Technologies, or UTC.
Subsidiaries include Pratt & Whitney and Collins Aerospace (created last year by merging the newly acquired Rockwell Collins with United Technologies Aerospace Systems, itself an amalgamation of UTC’s Hamilton Sundstrand companies and its 2012 acquisition, Goodrich). Also in the family are Otis and Carrier, makers of elevators and air-conditioners. A United Technologies Research Center supports all the UTC businesses.
Now, even UTC – which has long lagged the S&P 500 share price index – has thrown in the towel. Late last year it announced plans to split into three companies by hiving off the lifts and air-con units. Last week came word of a master plan to merge with missiles and military electronics player Raytheon to create an aerospace behemoth with combined revenues of some $74 billion – on a par with Airbus and second only to Boeing.
Were it so simple. UTC shares fell when it announced its Otis and Carrier plan, and both firms’ shares fell on news of the latest deal. Investors seem wary of the huge cost of such massive corporate surgery.
This latest merger will certainly create scale, but it is far from obvious how either constituent company benefits. Very little product overlap suggests few opportunities to exploit technology jointly. There will be huge costs to come, and UTC has spent fortunes on big, disruptive acquisitions this past decade.
Raytheon will give UTC more exposure to the US military market, and UTC will better connect Raytheon to civil markets. That is, Raytheon Technologies may prove to be just another conglomerate, within the very broad category that is aerospace. Time will tell if it finds more leverage.