Guy Norris/LOS ANGELES Chris Jasper/LONDON

United Technologies (UTC) and Honeywell shocked the aerospace industry on 19 October by confirming that they are negotiating a tie-up. In a short statement, the pair say they are "in discussions regarding a possible business combination".

The deal, if concluded as a full merger without major divestitures, would create a company with total revenues of almost $50 billion based on 1999 results.

Of this, more than $20 billion would be derived from a wide variety of aerospace-related activities - ranging from avionics, systems and engines to auxiliary power units and helicopters - making the combined company the industry's fifth-largest player.

The deal would be in line with a trend towards mergers among first tier suppliers, driven by the need to offer integrated systems solutions to primes. Options short of a full merger are also being considered.

UTC and Honeywell went public as the latter's share price fell again following lower than expected Q3 earnings, mostly due to charges related to non-aviation businesses. In addition to its aerospace activities, Honeywell (formed after AlliedSignal's purchase last year of the company whose name it kept) is engaged in factory automation, controls for homes and buildings and speciality chemicals manufacture and brakes.

The world's second-biggest aero-engine manufacturer, Pratt & Whitney (P&W), delivers a third of UTC's sales - although it lags behind a building systems unit which offers clear synergies with Honeywell and includes Otis elevators and the Carrier heating/air conditioning business. UTC's Flight Systems division, which includes Sikorsky and Hamilton Sundstrand, accounts for a further 16% of revenues. The two already co-operate in - an aerospace e-marketplace.

Though the pair had roughly equal sales last year - UTC deriving $11.5 billion (48%) from aerospace and Honeywell $9.1 billion (38%) - the stronger UTC is leading the deal. Reports say it has offered 0.74 UTC shares for each Honeywell one, valuing the transaction at $40 billion.

The deal may face regulatory hurdles in the USA and Europe. In aerospace terms, areas of overlap are limited to auxiliary power units (70% of the world market), business and aircraft engines (Honeywell competing with P&W Canada) and commercial and regional aircraft systems (Hamilton Sundstrand's Electric Systems, Air Management and Power Systems and Engine Systems divisions competing with Honeywell's Engines and Systems and Aerospace Electronic Systems units). General Electric has apparently already expressed interest in Honeywell's engine activities.

• Litton Industries is to "explore the sale" of its Advanced Electronics group (1999 sales $1.6 billion), consisting of 12 divisions covering avionics, inertial navigation and electronic warfare.

Source: Flight International