UTC and Rockwell Collins: One Plus One Equals Less Than Two

UTC has been on a mission to insulate its defense businesses from the wild swings inherent in delivering big ticket platforms to the U.S. military, selling its Sikorski helicopter business to Lockheed Martin two years previously and purchasing aerospace parts maker Goodrich Corp in a natural complement to UTC’s Pratt & Whitney division. On the whole this strategy has worked, with UTC papering over the friction caused by differences in corporate culture in its various acquisitions with a reasonably benevolent attitude to employees, sufficient delegation to management teams to foster constructive decision making, and a firm hand from the headquarters.

All that could be changing with UTC’s proposed acquisition of Rockwell Collins (1). Sometimes labeled an aerospace parts manufacturer as is UTC, the company is actually nothing of the sort. Instead it manufactures radios and communications equipment for the commercial aviation industry, law enforcement, and the U.S. government.

UTC may have been after B/E Aerospace, an airframe interior equipment (e.g., lavatories, food and beverage equipment, etc.) manufacturer which Rockwell Collins acquired in 2016. B/E Aerospace will provide UTC a larger share of the parts pie when bidding for work at the major airframe manufacturers, although the disparity between high-tech fabrication and engineering at Pratt & Whitney and the low-tech fabrication and interior design at B/E Aerospace would seem to present somewhat of its own a culture problem.

Still, to get B/E Aerospace, UTC has to digest Rockwell Collins itself, a notoriously insular company with a demanding and paranoid corporate culture ensconced in its Cedar Rapids, Iowa headquarters. Before the B/E Aerospace purchase, Rockwell Collins had been inorganically growing by slurping up small radio engineering firms like an amoeba absorbing food in a petri dish. For each purchase, Rockwell Collins’ management would crack the acquisition open like a walnut, ditching the hard shell by shedding the old executive team, firing all the administrative staff, and consolidating any manufacturing–all in an effort to get at the small amount of nutmeat represented by the book of business and the relevant engineering talent. This allowed the crew in Cedar Rapids to expand their bonus portfolios without having to share the spoils with unwanted outsiders.

Now UTC is on the other side of this equation as it tries to figure out how to wring sufficient savings out of the Rockwell Collins purchase to justify the new interest payments on the $20 billion bill (2). But an acquisition sold to Wall Street as one-plus-one-equals-three is more likely to be one-plus-one-is-less-than-two. A portion of the Rockwell Collins’ executive team just made a killing on vested stock options and short-term retention agreements. They’re on their way out. The resentful and fearful remainder will be holding on to their turf in a death grip, fighting the caretaker executives assigned by UTC to digest the acquisition, while leveraging UTC’s ignorance of low volume, high customization radio electronics and their lack of the necessary compartmentalized security clearances. UTC’s caretaker executives will sweep in like Wyatt Earp’s marshals in Tombstone, with we’re-the-winners and you’re-the-backwater-losers arrogance and a quick trigger to fire anybody in their way.

The whole affair will be the defense and aerospace’s version of a grudge match–something that is played out elsewhere in the brutally competitive industry almost every day. UTC, all swelled up and aglow with confidence over its purchase and integration of Goodrich Corp., will not likely enjoy the experience.

(1) UTC most recently had a market value of $94 billion; Rockwell Collins $21 billion. Industry leader Boeing’s market value was $140 billion.

(2) And the $105 million in bankers fees it has to pay to the Wall Street capital raising rainmakers.

9/5/17 update: UTC confirms it has agreed to purchase Rockwell Collins for $30 billion. The announcement represents a $3 billion equity premium to the previously speculated figure. UTC will also take on $7 billion in Rockwell Collins debt.  UTC has already projected it will achieve $500 million in synergies by the fourth year after the deal.

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