UTC bid for Rockwell Collins taken seriously

Embraer KC-390 aerial tanker transport aircraft upgraded with a Rockwell Collins ProLine Fusion flight deck, one of the key products in Rockwell Collins’ line of avionics. PHOTO ROCKWELL COLLINS


By Dave DeWitte

An unconfirmed bid by United Technologies Corp (UTC). to acquire Rockwell Collins has already raised concerns about losing a local headquarters operations and boosted Rockwell Collins shares sharply.

UTC, a Connecticut-based multinational conglomerate, was reported to be offering up to $140 per share to acquire Cedar Rapids-based Rockwell Collins, based on multiple reports citing anonymous sources close to the deal. After word of the talks surfaced Aug. 4, Rockwell Collins shares, already near a record, climbed from Aug. 4’s close around $119 to $127 three days later.

The conglomerate owns such iconic industrial brands as Otis elevators, Carrier air conditioners and Kidde fire extinguishers. But it’s reportedly interested in expanding its market positions in aerospace components, which are already the largest of any United States component supplier.

UTC supplies Pratt & Whitney aircraft engines, and through its UTC Aerospace Systems business, provides propeller systems, interiors, aircraft structures and landing gears. By adding Rockwell Collins, it could add to its customer base and gain more bargaining power with aircraft manufacturers by being able to supply more content, and enable them to interact through digital technologies.

Neither UTC nor Rockwell Collins would comment on the reported bid.

Cedar Rapids Mayor Ron Corbett said he met with Rockwell Collins leadership Aug. 8 to learn what he could about the situation and what it could mean for the city.

“There are a lot of things they don’t know at this time, and a lot of the things they know they couldn’t talk about,” Mr. Corbett said.

The reports raise a concern, Mr. Corbett said, about the possibility of losing a corporate headquarters operation. He noted that headquarters operations often bring with them an added degree of philanthropy and community involvement.

The mayor was quick to say that he isn’t pre-judging the outcome or what it means, however. He pointed out that what’s now Rockwell Collins was previously part of Rockwell International, which was headquartered elsewhere. The Cedar Rapids economy has benefited from some past acquisitions, he said, particularly in the area of gaining capital for expansion and improvements.

A University of Iowa associate professor of finance who studies acquisitions and mergers said she wouldn’t rule out a UTC bid for Rockwell Collins succeeding, but not at the price quoted in a Wall Street Journal article of up to $140.

“These things are hard to predict,” said Yiming Qian, associated professor of finance in the UI’s Tippie College of Business. “It’s safe to say there is no way Rockwell Collins will accept the price as-is.”

Even at $140, that price would represent a premium of less than 18 percent to Rockwell Collins’ closing stock price of about $119 on Aug. 4.

“The average premium across the industry is 30-40 percent,” Ms. Qian said.

On other points, Ms. Qian offered a brighter assessment of the prospects. UTC appears to have the size and financial capacity to acquire a company the size of Rockwell Collins, which had a market capitalization of about $19 billion before news of the offer leaked, and of $20.7 billion by mid-day trading on Aug. 9.

Antitrust reviews in mergers between two companies with such large positions in an industry – in this case aerospace components – can sometimes be a sticking or a stopping point. A $42 billion deal for General Electric to acquire Honeywell International, which competes with Rockwell Collins in some areas, was recently rejected after a European Union antitrust review.

Ms. Qian said it’s probably less of a problem than it might appear in the case of UTC and Rockwell Collins, because there is hardly any overlap in the kinds of aerospace products the two companies make.

“If they want to go ahead, they are probably able to overcome them,” she said.

That doesn’t mean the merger would get an easy ride in antitrust review by the United States Department of Justice and other national jurisdictions in which the companies have operations. Ms. Qian said Boeing, Airbus or other large suppliers might object to having a larger and more powerful supplier, and less competition among suppliers.

Scaling up by joining UTC is one way Rockwell Collins could respond to the potential of lost business from its largest customer. Boeing announced last month the formation of an internal avionic business unit, which will supply much of the avionics equipment currently purchased from suppliers such as Rockwell Collins.

Boeing CEO Dennis Muilenburg told employees that the move is a way for the company to drive down costs and increase value for customers, according to an internal Boeing memorandum widely cited in the media. He also expects it to enable Boeing to capture more ongoing revenue from things like parts, maintenance and software upgrades to avionics systems that are now going to suppliers.

Rockwell Collins chairman and CEO Kelly Ortberg responded to Boeing’s announcement in an internal memo to employees, urging calm. Company spokesman Josh Baynes released a prepared statement, indicating, “We were well aware that this is a long-term strategy for Boeing and do not anticipate any impact to our business in the foreseeable future. That’s partly because Rockwell Collins already has strong equipment positions on Boeing’s 787 Dreamliner and some of the company’s other next-generation aircraft.”

While Rockwell Collins and UTC remained mum on the acquisition buzz last week, that’s entirely common in merger situations between publicly traded companies. Discussing uncertain merger prospects before a deal has been presented to shareholders is typically prohibited, in part because it could influence share prices based on information that later turns out to be incomplete, inaccurate or uncertain.

Ms. Qian could see one additional – and very large – factor that could sway Rockwell Collins not to move on an offer unless it is significantly sweetened. She pointed out that Rockwell Collins is “doing very well” even before reaping the full benefits of its recent $8.3 billion acquisition of B/E Aerospace, an aircraft interiors business, which it is still assimilating. The company’s share price is up some 40 percent in the year preceding Aug. 4, when the UTC news came out, and more than 120 percent in the preceding five years.

“They’re not desperate,” Ms. Qian said.

CBJ Senior Business Reporter Dave DeWitte has previously provided contractual services to Rockwell Collins.