The United Technologies Merger With Raytheon Could Be Bad News for GE -- Barrons.com
By Ben Levisohn
United Technologies (ticker: UTX) and Raytheon (RTN) want to come together to create one giant defense and aerospace company -- and that could be bad news for General Electric (GE), according to Bank of America Merrill Lynch.
The back story. In the industrial sector these days, it isn't good to be big -- unless you're big in the right way and the right things. That has companies mixing and matching parts to create new companies that are big enough to dominate one or two areas, and shedding smaller pieces that might not fit into the puzzle.
That's the case with United Technologies, which had already announced the spinoff of its Otis elevator and Carrier air conditioning businesses. GE, meanwhile, has been shedding businesses of its own, to focus on its power and aerospace businesses, among others.
What's new. United Technologies' merger with Raytheon will create an aerospace giant, one that could make life difficult for GE in the long run, according to Merrill analyst Andrew Obin. The combination would allow United Technologies to boost its long-term investment in geared-turbofan jet engines, the most efficient type of jet engine -- making it a stronger competitor to GE.
It will do this at the same time that GE is forced to be careful about what it spends, Obin says. "Historically, GE Aviation was better able to continuously invest in jet engine technology relative to UTX's Pratt & Whitney and Rolls-Royce," he writes. "With today's smaller GE still struggling with cash flow, a combined UTX/RTN would be better positioned to compete for new narrowbody opportunities, particularly if the program gets accelerated before GE is able to rebuild its [free cash flow]."
Looking ahead. The market doesn't seem to be worried about the possible competition. GE stock has gained 2.2% to $10.20 as of 12:52 p.m. Monday, while United Technologies has dropped 1.7% to $129.86. Raytheon stock has risen 1.6% to $188.93, and the Dow Jones Industrial Average has advanced 0.6% to 26,132.52. Maybe that means no industrial can afford to stand in place in this environment, especially not GE.
Obin suggests one possibility: A combination of General Electric and Honeywell International. "We have argued in the past (particularly after UTX/Rockwell deal) that the combination of GE/HON would improve the standing of both companies vis-à-vis Boeing (BA) and Airbus (EADSY), both of which are more focused on the aftermarket, as well as larger UTX Aerospace," Obin writes.