Could United Technologies Merger With Rockwell Collins Get Shot Down?

Print Email

Tuesday’s announced $30 billion acquisition of Rockwell Collins Inc. (NYSE: COL) by United Technologies Corp. (NYSE: UTX) did not sit well with investors, who took UTC’s stock down nearly 6%. There are more unhappy campers as well.

Neither Boeing Co. (NYSE: BA) nor Airbus is pleased with the announcement. Boeing is skeptical that the deal is in the best interests of either the aircraft industry or the company’s own customers. Airbus is worried that the deal will blur UTC’s focus on supplying the Pratt & Whitney geared turbofan engines to the European aircraft maker so that Airbus can meet its sales commitments.

Airbus and Boeing are talking their book of course, but that doesn’t mean their concerns can be ignored. An analyst from William Blair told Bloomberg News that both companies will have a say on the fate of the merger because they have a “disproportionate influence” throughout the aircraft makers’ supply chains. Contract clauses allow Boeing and Airbus to act as “a gatekeeper for potential structural changes in the supplier base.”

A combined UTC/Rockwell would supply avionics, interiors, landing gear, electrical systems and a multitude of other parts to the airframe makers. More than 60% of Boeing’s 787 would be supplied with UTC/Rockwell parts, according to one estimate.

That amount of leverage would position UTC/Rockwell to break away from Boeing’s “Partnering for Success” program, which has squeezed another 10% to 15% price cut out of its suppliers. Boeing may well find it impossible to find suppliers to replace UTC/Rockwell and then where would the company be? Even if Boeing could, the transition to a new supply chain would not happen overnight and the switch would be very painful.

Couple that with the coming increase in building single-aisle planes like the 737 MAX and the A320neo. Any hitch in that transition threatens the very existence of Boeing and Airbus.

Boeing, at least, will certainly fight hard to protect its interests, and for now those interests are not best-served by the UTC-Rockwell merger. The biggest threat is that UTC/Rockwell will once more open its wallet to buy one more big chunk of Boeing’s supply chain — fuselage maker Spirit AeroSystems Holdings Inc. (NYSE: SPR).

Is that a realistic fear? After all, UTC is going to pile up more debt with its acquisition of Rockwell and bond rating agencies are going to take a closer look at the company’s financial footing. Spirit’s current market cap is around $8.8 billion, so even paying a reasonable premium, a premier Boeing supplier could be acquired for a lot less than Rockwell cost.

So Boeing — and Airbus — are likely to do all they reasonably can to scuttle the UTC-Rockwell deal. Look for Boeing to turn to its friends in high places in Washington, D.C., for regulatory help. And both companies will wave around their existing contracts with UTC and Rockwell, likely demanding a full measure of concessions in order to win the aircraft makers’ support for the deal.

The implications of the UTC-Rockwell tie-up are more serious for Boeing and Airbus than the WTO squabbles that have taken up the past decade or so, and they are more important to Boeing than its battle with Canada’s Bombardier over government subsidies.

Boeing and Airbus have to win some strategic concessions from UTC or they have to fight the deal as if their lives depended on it.