This Expensive Aerospace Deal Is Leaking Fuel

(Bloomberg Businessweek) -- United Technologies Corp. aims to close its purchase of avionics maker Rockwell Collins Inc. this month, pending approval from Chinese antitrust regulators. The $30 billion deal will bundle Rockwell’s information-management and navigation systems with UTC’s jet engines and landing gear. The idea is that the combined company will be better able to weather the cost cuts Boeing Co. and Airbus SE demand from their suppliers and win a bigger share of the work on next-generation jets. There’s logic to this, but it’s a defensive move and an expensive one at that: The price represents one of the richest multiples of profit ever paid in an aerospace deal.

UTC was already the biggest supplier of plane parts; it’s unlikely that getting even bigger will impress Boeing or Airbus. It’s instructive to look at what happened after the company bought aircraft parts maker Goodrich Corp. for $18 billion in 2012. Newly swelled in size, UTC balked at the price cuts Boeing demanded on landing gear for the 777X. Boeing called its bluff, handing the contract to a small Canadian manufacturer.

Tax reform has taken some of the sting out of the purchase price. But on the flip side, Boeing has accelerated its push into the market for airplane parts and services that have typically been the purview of suppliers such as UTC. That raises the specter of UTC not only negotiating deals with Boeing, but also someday competing for them with Boeing’s own businesses. Shortly before the Rockwell announcement in 2017, Boeing launched an avionics unit. Still a small effort, it underscores Boeing’s aspiration to tap demand for connected aircraft. UTC hopes to apply Rockwell’s software expertise to its own aircraft parts to go after the same opportunity.

The biggest benefit of the Rockwell deal is that it paves the way for UTC to break up. Chief Executive Officer Greg Hayes had previously resisted calls to separate aerospace from the elevator and climate-control divisions, in part because jet engine development is expensive and he needed the cash from the other businesses to fund it. Adding Rockwell will make it easier for the aerospace units to stand alone. Activist investors Dan Loeb and Bill Ackman have advocated for a breakup. But pursuing one means Rockwell will be a bigger part of the remaining company, increasing the pressure on Hayes to make the deal pay off.

$500 Million

● A Million Saved Is a Million Earned
United Technologies is targeting $500 million or more in cost savings from the Rockwell Collins acquisition.

● Tight Squeeze
The savings will help United Technologies mitigate Boeing’s ongoing push for cost cuts at its suppliers. —Sutherland is a deals columnist for Bloomberg Opinion.

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