UTC's $30 Billion Acquisition of Rockwell Collins
Deal Overview
Acquirer: United Technologies Corporation (UTC)
Target: Rockwell Collins Inc.
Total Transaction Size: $30 billion
Closed Date: 26th November 2018
Company Details: Acquirer - United Technologies Corporation (UTC)
Founded: 1928
CEO: Gregory J. Hayes (at time of acquisition)
United Technologies Corporation (UTC) originated as Boeing Airplane & Transport Corporation in 1928, founded by William E. Boeing. After a year it was named United Aircraft and Transport Corporation, until becoming United Aircraft Corporation in 1934, officially becoming UTC on 1st May 1975. At the time of UTC's acquisition of Rockwell Collins, the CEO was Gregory J. Hayes.
UTC was an American multinational conglomerate focused in the aerospace industry. Similar to Boeing's other companies, UTC gained commercial success through the great demand for Pratt & Whitney piston engines during World War II, which is what the company specialised in. The company continued to grow, becoming a powerhouse in the aerospace sector. However, after the company became UTC in 1975, the then CEO, Harry Jack Gray, diversified the company into industries outside of aerospace. UTC began a series of hostile takeovers of civilian businesses to avoid an overreliance on military business. Today, the company is now Raytheon Technologies Corporation (RTX) after a merger in April 2020. RTX is the second-largest aerospace defence company behind Boeing with a market cap of $163 billion, also operating in electronics, cyber, and space.
Company Details: Target - Rockwell Collins Inc.
Founded: 1933
CEO: Robert "Kelly" Ortberg (at time of acquisition)
Market Cap: $23 billion
Rockwell Collins was founded as Collins Radio by Arthur Collins in 1933. After financial difficulties, Rockwell International acquired Collins Radio Company in 1973, becoming Rockwell International. On 29th June 2001, Rockwell International became Rockwell Collins Inc. after focusing on aviation electronics and trading on the New York Stock Exchange. At the time of acquisition, the CEO of Rockwell Collins was Robert "Kelly" Ortberg.
After steady growth, the company took off when Collins supplied the equipment to establish a communications link with the South Pole expedition of Rear Admiral Richard Byrd. The company gained commercial success through the Cold War space race. Collins Radio provided communication systems to America's space programme, allowing transmissions from stations on earth to astronauts in space. However, after the acquisition in 2001, Rockwell Collins became focused on aviation electronics, exiting their electronics and agriculture businesses. The market cap of Rockwell Collins at the time of acquisition was $23 billion.
The Acquisition and Legal Contention
UTC first announced their acquisition of Rockwell Collins on 4th September 2017. UTC had been lacking the speciality in the interior units industry that Rockwell Collins was excelling at. Rockwell Collins had been supplying avionic networks and communications decks to significant companies such as Boeing, and working on projects like the Airbus A220 and A350. The avionics network was considered the weaker side of UTC, therefore, the acquisition of Rockwell Collins would fill this gap in UTC's portfolio. The purchase price implies a total equity value of $23 billion and a total transaction value of $30 billion, including Rockwell Collins' net debt. The deal was completed on 26th November 2018.
Since this deal was so large, it had a potential effect on the EU market, which meant that the European Commission had to examine this merger and approve the deal. The first issue raised was that the acquisition may eliminate competition in the market for the interior units industry, such as pilot controls and TRAS. Due to the fact that both UTC and Rockwell Collins were big players in the industry, the proposed deal may have eliminated competition for competing suppliers.
The other potential issue was the market dominance in the oxygen systems industry. The market was already highly concentrated with Rockwell Collins as the leading global supplier, which meant that the merger with UTC would result in both companies having over 50% of control over the EU market, thus impeding competition in the EEA. The Commission must investigate companies with turnovers that meet certain thresholds following Article 1 of the Merger Regulations, so prior, UTC notified the Commission of the merger for review. Since UTC began development of these products before the merger, there was a concern that the overlap in goods produced would further contribute to their dominance in the EU market.
The Commission found in favour of UTC and approved the acquisition, particularly after UTC agreed to remedy the Commission's concerns. UTC agreed to end all Rockwell Collins business within the pilot control and TRAS systems, and put an end to the two UTC research projects in oxygen systems. This meant that the product overlap would be remedied and the merged company would not have the portfolio to shut out other competitors. After collaborating with the US Department of Justice, the Canadian Competition Bureau and the competition authorities of Brazil and China, the Commission concluded that the proposed merger did not raise competition concerns within the EEA.
The Future
This was one of the biggest deals in the aerospace industry. The impact was so large that the day after the merger was announced, the share price of most aerospace and defence companies fell by two percent. The deal brought together 70,000 employees across 300 sites and $23 billion in annual sales on a 2017 pro forma basis.
From a legal standpoint, the Commission scrutinised the product overlap, highlighting the need for large companies to make compromises for EU approval regarding the review of these deals. It may serve as a warning for companies who are already well-established in similar industries from initiating mergers which would substantially reduce competition in the EU market. However, the Commission mentioned in their report that most companies who provide notification of their mergers would be unlikely to pose competition problems.
UTC separated into three different companies following the acquisition: UTC, Otis, and HVAC. The decentralisation of the company allowed for financial flexibility and focus for growth. Independent equity currency for each company allowed for aligned management and the subsequent capital allocation strategy allows for a focus on their respective industries, resulting in growth. This decision by Hayes was endorsed as it allowed for $20 billion in shareholder value.
Today, as a result of the acquisition and accompanying three-way split, the companies have continued to grow, and after the acquisition by RTX, their market cap has surpassed Boeing, becoming the second-largest aerospace company in the world.
References
Collins Aerospace. (2018, November 26). United Technologies announces intention to separate into three independent companies; completes acquisition of Rockwell Collins.
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Collins Aerospace. (n.d.). Rockwell Collins History.
Bellamy III, W. (2018, November 27). UTC Completes Acquisition of Rockwell Collins. Aviation Today.
Tennant, F. (2017, November). United Technologies agrees $30bn Rockwell deal. Financier Worldwide.
European Commission. (2018, May 4). Mergers: Commission approves acquisition of Rockwell Collins by UTC, subject to conditions.
McCormick, W. (2018, December 6). UTC-Rockwell Collins Merger: New Financial Details Emerge. GovCon Wire.
Kissler, M. & Rausch, N. (2018, November 27). United Technologies Plans Three-Way Split to Focus on Aerospace. Industry Week.