Uncertainty Around United Tech's Merger Is A Good Moment To Buy

Summary

• The merger of equals (United Tech and Raytheon) has puzzled investors. The Companies' CEOs will try to justify their decision in a special joint question & answer session on Monday, June 17.
• Management has to deal with the strong negative market reaction after the announcement. Though, there is not much hope, they can talk the shares higher.
• United Tech's shares look attractive in the longer-term perspective given the remaining driver of unlocking value through the spin-offs.
• The merger with Raytheon could add to the value of the Aero division (Collins and P&W) through synergies and possibly a higher multiple.

United Technologies (UTX) and Raytheon (RTN) announced a merger on June 9. If successful, Raytheon's shareholders will end up with 43% in the new company named Raytheon Technologies and be given 7 representatives from 15 directors on the board.

The deal was immediately resisted by an activist-shareholder due to a lack of strategic sense. It seems right. The overlap in aerospace sales is less than 1%, according to the United Tech's CEO himself. The deal is complementary in nature. United Tech will get significant free cash flow generation from missile defense sales, and Raytheon will benefit from stable service revenue. Overall it will bring diversification to the companies in the face of cyclical uncertainty, as analysts said.

I suppose this uncertainty, which management of United Tech and Raytheon are likely concerned about, was the reason for the sell-off in the sector. The shares of the companies fell below the pre-announcement level. This uncertainty brought an opportunity to buy at lower levels.

Source: tradingview.com

The merger needs to be clarified. The companies' CEOs will try to explain their motivations in a special joint question & answer session on Monday, June 17.

United Tech has to deal with high debt loadings. United Tech's management showed how exactly they are going to strengthen the company's balance and apparently shareholders did not like it.

On the other hand, Raytheon's decision to diversify away from an attractive exposition on missile defense is harder to justify. About 20% of the company's revenue is classified, and management suddenly wants to lower this exposition. What is there to be afraid about?

This brings parallels with recent mergers in the sector of auto-manufacturers. The auto industry has been going through hard times for a while already. It seems prudent when Renault (OTCPK:RNLSY) and Fiat-Chrysler (FCAU) are making plans on mergers

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in UTX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article is for informational purposes only. Please do your own due diligence before making any investment decisions.