United Technologies-Rockwell Tie-Up Looks Likely

Reports surfaced Aug. 4 that wide-moat

While the deal might end up being a bit pricey (see our Aug. 9 note for financial details), we clearly see a strategic motivation. United Technologies has struggled to grow, and its aerospace business remains highly dependent on the future of its revolutionary geared turbofan engine, which has faced production quality challenges. Rockwell should inject some growth and also diversify United Technologies' portfolio, given the minimal overlap between the two companies' business lines.

We expect Rockwell will command a premium, so we've put the acquisition price at around $142 a share, which is 20% above the pre-deal-rumor share price, but we think the final price could easily end up in the $150s. Rockwell is one of the few attractive targets that could move United Technologies' $57 billion revenue needle. The other sticking point revolves around Airbus and Boeing. We expect both aircraft manufacturing behemoths to push back against merger approval, arguing that it exacerbates a lack of competition among their suppliers. For years, Boeing and Airbus encouraged (or at least acquiesced to) mergers in order to better support their programs. They are victims of their own success, as we count only seven major system, engine, and interior suppliers today: General Electric, United Technologies, Honeywell, Rockwell, Safran, Rolls-Royce, and Thales.

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