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Collins Expects Substantial Synergies from UTC-Raytheon Merger

 - February 6, 2020, 9:00 PM
Collins Aerospace may have to divest itself of its secure military air-to-ground communications and GPS business following the UTC-Raytheon merger.

Collins Aerospace will remain substantially intact following the completion of parent United Technologies Corporation’s planned merger with The Raytheon Company and Collins CEO Kelly Ortberg believes the merger will produce substantial new revenue synergies for his company.

UTC’s and Raytheon’s shareholders voted on October 11 to approve the planned merger, which would create one of the world’s three largest aerospace OEMs overall and the second-largest military OEM. The merger would bring under the new Raytheon Technologies corporate umbrella UTC’s Collins Aerospace and Pratt & Whitney businesses beside Intelligence, Space and Airborne Systems and Integrated Defense and Missile Systems divisions contributed by The Raytheon Company. Assuming the planned merger partners receive all required regulatory approvals, they expect to consummate the merger in April.

At Collins Aerospace, which is expected to generate higher revenues in 2019 than any of the other three planned Raytheon Technologies businesses, “there will be no major change in what we do” following the merger, said Ortberg.

Kelly Ortberg Collins CEO
Kelly Ortberg Collins CEO

Collins Aerospace itself expects eventually to see at least $600 million of cost-reduction synergies annually from the November 2018 merger between UTC Aerospace Systems (UTAS) and Rockwell Collins which created Collins; it has achieved about $250 million of them to date. But Ortberg said UTC and Raytheon expect most of the major cost-reduction synergies from the planned 2020 Raytheon Technologies merger “to be primarily at the corporate level” of the parent companies.

However, he added, “we do believe there will be some significant revenue synergies for us in terms of [mutually increased business generated together with] the Raytheon portfolio. But we can’t do any exchange [of business planning with Raytheon] until the merger closes.”

That is unlikely to be a concern for Collins Aerospace, which is already hard at work to achieve over time more than $1 billion of expected revenue synergies annually from last year’s merger with Rockwell Collins. By the end of 2019, it will have achieved about $175 million of those synergies, according to Ortberg.

Although Collins Aerospace expects its business to be substantially unaffected overall by the planned UTC-Raytheon merger, it does already know it won’t emerge from the merger entirely as it is now. In late October, officials with the U.S. Department of Justice’s antitrust division asked Collins Aerospace to divest its military GPS business—which is located in Cedar Rapids, Iowa and which Rockwell Collins brought to its merger with UTAS—as a pre-condition for DOJ approval of the UTC-Raytheon merger.

“The reason for that is there is an overlap between Collins Aerospace and Raytheon in [the] military GPS” business, said Ortberg. He told AIN in May—and reiterated to reporters in late October—that he sees providing armed forces with secure military air-to-ground communications and accurate navigation in the GPS-denied and jammed environments as representing a substantial long-term business opportunity for Collins Aerospace. Asked if the divestiture of its military GPS business might, then, represent an issue for his company following the UTC-Raytheon merger, Ortberg replied, “The company still has and will have GPS [technological] capability. From a long-term perspective, those competencies and capabilities will still exist” within a future Raytheon Technologies.

As of early November, Collins Aerospace hadn’t yet identified a buyer for its military GPS business or determined when the requested divestiture would take place.