How to Trade the Announced United Technologies - Raytheon Merger

It was merger Monday. On Saturday, the Wall Street Journal released an article, saying that United Technologies had agreed to merge with Raytheon. These are some of the biggest industrial companies in the United States with a market capitalization of more than $113 billion and $52 billion.

The combination of the two companies will create an aerospace and defense company with a market capitalization of more than $100 billion. It will be lower than the current valuation of United Technologies because the company is in the process of divesting its Otis and Carrier businesses. Otis is the market leader in escalators while Carrier is a major player in the heating systems.

Raytheon Technologies - How it will be

The combined company will be known as Raytheon Technologies and will be owned majorly by the United Technologies shareholders. They will own 57% of the combined company and will also appoint 15 directors. The current United Technologies CEO will be the CEO of the company while the CEO of Raytheon will be the chairman.

The goal of the transaction is to diversify the companies and create more synergies. United Technologies is popular for its Pratt and Whitney division that manufactures jet engines for the commercial aircraft. Raytheon on the other hand is an expert in missile defense systems, precision weapons, radar warning systems, and tomahawk systems. A significant portion of its revenue comes from the Pentagon.

The combined company, which will be based in Boston will have annual revenues of more than $70 billion and more than $26 billion in total debt. It will also return to shareholders more than $18-$20 billion through dividends and share buybacks. It comes at a time when the Pentagon has warned about the mergers and acquisitions in the sector. This could mean a hindrance to the deal being closed. However, because there is small overlap between the two companies, it means that it will likely be allowed.

The deal comes a few days after another high-profile deal between Fiat Chrysler and Renault fell apart. The deal would have created the third-largest automobile group in the world after Volkswagen and Toyota. The combined company would have increased geographical mix because Renault does not have any major presence in the lucrative United States market. Fiat Chrysler has a huge US presence because of the Chrysler division.

However, the French authorities, which own 15% of Renault saw it unwise to continue with the merger. This is partly because of the complex ownership structure of Renault, which is also partly owned by Nissan and Mitsubishi. The chart below shows how the two companies reacted after the news was announced.

fca-renault chart

Chart of Renault after the no-deal with FCA

How to trade the United Technologies-Raytheon merger

As a trader, arbitrage is one of the best ways to trade the mergers and acquisitions. In normal acquisitions, the immediate reaction is that acquiring company’s stock declines while that of the company being acquired falls. However, as the debate intensifies, there could be changes especially if a vocal shareholder emerges opposing the acquisition. This happened recently when Carl Icahn invested in Occidental Petroleum and announced that he would oppose its expensive acquisition of Anadarko.

Another thing you should focus on is on regulators, who must accept or reject any deal.

In the case of United Technologies and Raytheon mergers, it is important for you to watch the statements of Bill Ackman and David Einhorn, two powerful activist shareholders. Their approval or disapproval of the deal will be very important and will cause the stock prices to soar or decline.

Other Useful Resources

The Article by CNBC

An interesting Analysis by Forbes

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