United Technologies-Rockwell Merger: Behemoth In The Making?

According to various media reports, diversified industrial conglomerate United Technologies Corporation (NYSE:UTX) is reportedly giving final touches to a purported move to acquire Iowa-based avionics firm, Rockwell Collins, Inc. (NYSE:COL) . The strategic transaction is likely to create an industry behemoth with an unrivalled competitive advantage, being one of the largest aircraft equipment manufacturers in the world in its individual capacity.

The Proposed Merger

Although both the company spokespersons refused to comment on the developments, persons familiar with the deal revealed that negotiations are in the final stages and an official announcement could be made as early as this weekend. United Technologies is apparently working on the modalities of the purchase price in the vicinity of $140 for each share of Rockwell Collins that equates to a deal value of about $20 billion.

The news boosted investor confidence as shares of both the companies were significantly up during the trading hours yesterday. While shares of United Technologies rose 2.9% to close at $118.70, Rockwell Collins stock climbed 2.2% to $130.74. Incidentally, United Technologies has outperformed the industry with an average year-to-date return of 8.3% as against a decline of 3.1% for the latter.

Likely Fallouts

The acquisition is expected to offer United Technologies a bigger clout in the industry and increase its bargaining power as it would emerge as one of the largest aircraft equipment manufacturers in the industry. The combination is likely to yield operating synergies through lower operating costs and more opportunities to cross sell the products. With an improvised product portfolio, the company is likely to become an even more critical supplier of components to big aircraft manufacturers like The Boeing Company (NYSE:BA) and Airbus SE (OTC:EADSY) .

In addition, the transaction will strengthen the aviation segment of United Technologies, which includes Pratt & Whitney and Hamilton Sundstrand. This, in turn, could assist the company to spin off its aviation businesses at a later date to focus more on the sector dynamics.

The consolidation of two industry heavyweights could further set off a wave of similar such deals across the defense industry. The proposed acquisition of Rockwell Collins by United Technologies is the third such transaction among aircraft manufacturers in less than a year. Rockwell Collins itself acquired B/E Aerospace this spring for $8.6 billion to gain a strategic footprint in cabin interior systems such as seats, galleys and lavatories. This was preceded by the acquisition of French aerospace equipment maker Zodiac by French aero-engine maker Safran (PA:SAF) earlier this year.

Moving Forward

The acquisition is expected to boost United Technologies’ aerospace segment that has been struggling of late with severe delays in for supply orders in the Pratt & Whitney division. We remain bullish on the inherent growth potential of this Zacks Rank #3 (Hold) stock post this transaction. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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