Raytheon-UTC merger goes forward, but what’s the upside?

“Today’s settlement protects the American taxpayer by preserving competition that leads to lower costs and higher innovation in critical military and defense products,” said Assistant Attorney General Makan Delrahim of the Antitrust Division. “The merger [between Raytheon and UTC], as originally proposed, would have eliminated competition in the supply of military airborne radios and military GPS systems, and would have positioned the merged firm to harm rivals capable of making key components for reconnaissance satellites. These horizontal and vertical concerns are resolved by the Division’s structural remedy, which includes the divestiture of three separate business units.”

That was from a Defense News article, “Raytheon-UTC merger wins approval, pending divestiture.” BAE Systems agreed to buy both Raytheon’s airborne radios and UTC’s military GPS systems. Another company will buy UTC’s optical systems work. You can see more on the merger from my podcast with James Hasik, and a post on how Raytheon-UTC want to get out of the “platform” business in defense and focus on components.

If the businesses were really doing “apples and oranges,” then it’s not clear to me where the economies of scale come from through a merger. It’s not likely that we’ll see the consolidation of high-rate manufacturing locations. The larger firm should also encounter higher communications costs. However, these conglomerates often allow significant freedom to the individual business units. Perhaps the savings are anticipated in the corporate functions associated with compliance, bid & proposal, and independent R&D.

I think the merger makes sense if one expects current acquisition trends to continue. Extremely large and infrequent programs/contracts requires firms to scale up to achieve sales stabilization across the portfolio. However, if innovation hub efforts start working — creating more opportunities for “modular” efforts — then the increased size doesn’t necessarily help it react quickly to emerging contracts. It could hinder growth.