Friday, April 3, marks the first day of share trading for the merged enterprise of Raytheon and United Technologies, to be known as Raytheon Technologies. Otis and Carrier, the two non-aerospace, non-defense businesses formerly part of United Technologies, are being spun off. What remains is a more coherent enterprise that will, as CEOs Tom Kennedy and Greg Hayes have argued, define the future of aerospace and defense.
This is not the first time Raytheon and United Technologies (contributors to my think tank) have undergone corporate transformations. United Technologies began its history as United Aircraft after the government in 1934 forced the breakup of a trust that included Boeing and United Airlines. It became a multi-industry conglomerate under CEO Harry Gray in the 1970s, and now under Greg Hayes has returned to its roots in aviation.
Raytheon traces its origins to the dawn of home radio in the 1920s, and it too grew into an industrial conglomerate (Amana radar ranges among other lines) before bulking up on defense at the end of the Cold War. Its defense portfolio eventually included the products of such legendary military contractors as Hughes Aircraft and E-Systems, while its commercial lines were sold off.
It is one of life’s little ironies that when Harry Gray acquired Otis, Carrier and other commercial enterprises to fashion United Technologies in the 1970s, he was trying to reduce his company’s dependence on military business. A generation later, the company’s commercial fortunes had improved so much that what the business mix most needed was a bigger role in defense—which is what Raytheon delivers.
The newly-minted Raytheon Technologies (stock symbol: RTX) really will transform the aerospace and defense landscape, becoming a dominant global supplier to military, commercial and civil customers. To grasp why surprises like the coronavirus pandemic will not be able to hold it back, analysts need to understand the new enterprise’s five core features: scale, focus, depth, diversity and resilience.
Scale: United Technologies already was a big player in defense before the merger, thanks to the defense electronics work of Collins Aerospace and the growing military footprint of engine-maker Pratt & Whitney. Raytheon was one of the biggest military contractors in the world, selling missiles and sensors to all U.S. military branches and many overseas allies.
When those military lines are combined with the robust commercial portfolios of Collins and Pratt in the merged enterprise, what emerges is the second-biggest aerospace and defense company in the world. With $74 billion in pro forma (pre-coronavirus) sales, Raytheon Technologies isn’t just big: it is the number-one or number-two global supplier in most of its addressed markets, from jet engines to radars to cockpit displays to ejection seats to missiles.
Focus: Despite its complex portfolio of products, there is an underlying unity to the competencies of the merged enterprise. In the simplest terms, Raytheon Technologies is an electronics and propulsion company. Moreover, its electronic and propulsion skills are applied mainly to aerospace markets—not just on planes and missiles, but in air traffic control, in satellite constellations, and in communications networks.
The underlying unity of the enterprise will enable Raytheon Technologies to offer its myriad products in bundles that competitors have trouble matching. For example, on a Boeing 787, it provides electrical power, environmental controls, fuel measurement, braking, displays, lighting, seating, oxygen, fire suppression, thrust reversers, and cargo systems. On military missions like missile defense, the company can offer weapons, sensors, communications, battle management and logistics.
Depth: Raytheon Technologies will have 300,000 employees, the vast majority of whom are highly skilled (production of commodity items was outsourced years ago). That includes over 60,000 engineers working at the cutting edge of aerospace and defense technology, often with high-level clearances in the case of military work. No other aerospace company in the world surpasses the new enterprise in the depth or breadth of its competencies.
For instance, no other company has brought geared turbofan engines to market, a technology that is inherently more efficient that conventional turbofans. No other company has developed a fighter engine for the military combining the performance features and stealth of that on the F-35 fighter. And no other company in the defense sector can claim broader expertise in digital radar, electronic warfare, hypersonic weapons and cybersecurity. A senior Raytheon executive told me this week that planners expect a rapid acceleration in innovation arising out of the new enterprise’s technical depth and resources.
Diversity. In order to be a leading player in global aerospace, an enterprise needs to reach all major markets across the full breadth of the product life-cycle. It is not enough to be the original equipment manufacturer of world-class engines, because most revenues and returns are generated in the aftermarket. And it is not enough to be a leader in military avionics, because defense demand periodically turns down—usually just about the time commercial demand is picking up.
It may not even be enough to dominate the U.S. market for aerospace goods and services. Most aerospace demand originates outside the U.S., so economies of scale demand a presence in both domestic and foreign markets. When Raytheon Technologies states it has a “balanced and diversified A&D portfolio,” part of what the company is saying is that it operates successfully in diverse markets—commercial and military, domestic and international, original equipment and aftermarket. That vast presence will enable the merged enterprise to smooth out revenues and returns despite the cyclical ups and downs in each market segment.
Resilience. If an enterprise has scale, focus, depth and diversity, then it will probably have one other quality desired by shareholders and customers: resilience. Resilience has become a popular word in the Pentagon as military planners begin to grasp the challenges posed by a rising China. Many defense preparations that once seemed dependable, such as military space capabilities, now look vulnerable. Coronavirus is just the latest “black swan” warning to policymakers and investors that over the long run, only the strong survive.
The enterprise emerging from integration of Raytheon and United Technologies will be more resilient than either company was separately. Of course, it helps to start with solid building blocks; Raytheon was recently ranked by Fortune magazine as the most respected A&D company in the world. The combined enterprise will be even more formidable.
And while business conditions have changed a lot since the merger was first disclosed, in some ways the changes make a more compelling case for getting together. Nobody was saying much about sector consolidation a year ago. Now Raytheon Technologies may stand out as the first, and best, in a series of major consolidation moves making companies more able to cope with difficult market conditions.