Raytheon not likely to be poor stepchild in UTC deal

Elise Amendola/AP/Associated Press

We’ve seen this movie before. A high-profile Massachusetts employer — EMC, Gillette, John Hancock — strikes a buyout deal with a bigger company and gives up control to out-of-town executives.

Will that be the case with Raytheon Co., now that the Waltham defense contractor has agreed to combine with United Technologies Corp., a much larger aerospace company based in Connecticut? Like the poor stepchild in a fairy tale, will Raytheon’s managers end up living under the C-suite stairs? Will the inevitable postmerger layoffs cut deeper at Raytheon locations than at UTC’s?

Did one of the state’s premier companies sell itself after 97 years of independence?

The easy answer to each of these questions is yes. Despite billing the deal as a “merger of equals,” United Technologies chief executive Gregory Hayes has engineered a takeover of Raytheon that, if approved by shareholders and regulators, would make him chief executive of the second-largest US player in the aerospace-defense industry.

But that doesn’t mean it’s a bad deal for Raytheon — or Massachusetts. Here’s the more complicated case for why Raytheon chief executive Thomas Kennedy made the smart move when he reached out last year to Hayes to see if there was any interest in joining forces.

1. Forget about the public relations spin that this is a “merger of equals.” For all practical purposes, United Technologies is the buyer.

But that doesn’t change my view.

United Technologies is the bigger, more valuable company. That’s why, under terms of the agreement announced Sunday, it would control the new board of directors, and its shareholders would own about 57 percent of the stock of the combined company, to be called Raytheon Technologies.

Rare is the deal where everything is split 50/50.

“Sometimes, people will call a merger a merger of equals but, really, one of these companies is being acquired,” said Brian Quinn, an associate professor and mergers expert at Boston College Law School. “That’s basically the structure in this deal.”

Just because Raytheon is being acquired, it doesn’t mean the company has fallen into enemy hands.

2. A deal this size — the new company would have a market value of about $100 billion and an estimated $80 billion in sales next year — can happen for many reasons.

In this case, Kennedy contacted Hayes not out of weakness (Raytheon’s performance has been good), but because Hayes, in remaking UTC, had created a unique opportunity.

Based in Farmington, Conn., the company had been a classic conglomerate, making Sikorsky helicoptors, Otis elevators, Carrier heating and cooling systems, and Pratt & Whitney jet engines.

Since becoming chief executive in 2014, Hayes has been jettisoning businesses to narrow its focus on jet engines and avionics systems, including those made by Rockwell Collins, which he acquired in 2018 for $23 billion.

That streamlining got Kennedy thinking about pairing his military business — built around Patriot missile defense systems, Tomahawk cruises missiles, radars, and other equipment — with Hayes’s aerospace business. The combined company would be roughly split between defense and commercial customers, there would be little overlap in products or services, and Raytheon would be less dependent on any individual contract.

“The business to me is a natural fit,” Kennedy said Monday on a conference call with investors and analysts.

3. With little duplication between the two companies, the deal isn’t predicated on drastic cost-cutting and layoffs.

“We’re not taking out a lot of jobs,” Hayes said on the conference call.

“In fact, we’re going to create a lot of jobs through this merger,” he said, without providing specifics.

The combined company is promising cost savings of about $1 billion within four years of the deal closing (expected in the first half of next year). That’s not much for companies that together had expenses of $82 billion last year.

That might be one reason that investors didn’t give the deal a warm reception.

Raytheon’s stock rose less than 1 percent, while UTC’s dropped 3.2 percent, as investors questioned just how much additional profit growth the combination will generate.

Of course, there will be layoffs — there always are.

But the impact should be modest. Raytheon has 13,000 employees in Massachusetts (including 400 at its Waltham headquarters) and 67,000 globally, while United Technologies employs 19,000 in Connecticut and 240,000 around the world (including at Otis and Carrier).

4. Raytheon Technologies will be based in the Boston area, though a specific location has not been disclosed. That won’t mean a ton of new jobs — Connecticut Governor Ned Lamont said UTC would move 100 jobs to Massachusetts — but it never hurts to have a big company’s headquarters here, especially when it comes to civic engagement and philanthropy.

The deal also amounts to another vote of confidence in the state’s business climate — and a diss of Connecticut’s, which is still stinging from the defection of General Electric to Boston.

5. The deal could help the two companies ramp up research and development spending and weather the expected slowdowns in US defense spending. Commercial aviation and defense technologies are converging, and this deal will allow Raytheon and UTC to leverage each other’s know-how.

“We have a tremendous opportunity,” Hayes said. “The resources of the combined company will allow us to do things that on a standalone basis would have been very difficult.”

Did Raytheon have to find a partner now? Probably not.

But by acting from a position of strength, it was able to negotiate a deal that — in contrast to the takeovers of other local institutions — prevents it from being a colonial outpost for some distant corporate empire.