UTC/Collins Merger To Create 'Super Supplier'

The recent European Commission (EC) approval of United Technologies’ (UTC) proposed acquisition of Rockwell Collins brings the $30 billion merger closer to fruition as anticipated this summer. The companies announced the proposed acquisition September 4, a move that would result in a combined Collins Aerospace organization that would generate $23 billion in revenues, yield an anticipated $500 million in cost synergies, and create a potential “super supplier” that touches nearly every part of an airplane.

UTC CEO Gregory Hayes told analysts in recent months the proposed acquisition is “a lot better than even the deal that we approved with the board….It is the long-term nature of the aerospace and what we see today going forward that is going to make Rockwell Collins a great, great addition to UTC.”

UTC Aerospace Systems president David Gitlin highlighted the benefits gained from the acquisition, saying it will provide its portfolio “more customer and channel balance” and expand its reach on the connected aircraft. Another benefit he stressed was the possibilities for the future. “Just think about the fact that together, we and Rockwell Collins, are going to have close to 20,000 engineers, 20,000. And they can’t wait for us to close and unleash the possibilities associated with revenue synergies,” Gitlin told analysts.

Organizational Revamping

In preparation for the merger, UTC Aerospace Systems and Rockwell Collins have outlined a broad organizational structure that would have the new Collins Aerospace “small executive leadership” located at UTC’s Palm Beach County, Florida location.

The merged entity would be organized around six strategic business units based at existing UTC and Rockwell Collins locations: Aerostructures in Chula Vista, California; Avionics in Cedar Rapids, Iowa; Interiors in Winston-Salem, North Carolina; Mechanical Systems in Charlotte, North Carolina; Mission Systems in Cedar Rapids, Iowa; and Power & Controls in Windsor Locks, Connecticut.

“A goal in designing this new organization is to limit disruption, and employee relocations are expected to be minimal,” the companies said in a statement, adding, “The proposed structure will serve as the foundation for additional integration planning and will continue to evolve.”

The two entities are continuing to work through the necessary regulatory approvals, Hayes said, adding he sees no surprises in that process.

The acquisition received a major clearance with the May 4 announcement of European Commission (EC) approval. That acquisition set a condition that the combined entity divest overlapping businesses in the areas of actuators, pilot controls, ice protection, and oxygen systems.

“We can allow this merger to go ahead because in all the markets where we raised concerns, UTC has committed to divest activities covering the entire overlap between the two companies,” said commissioner Margrethe Vestager, who steers competition policy. Given the scope of activities involved with both companies, Vestager added, ”We need to ensure that competition is preserved for all of them."

UTC has a larger portfolio covering power generation, propulsion systems, and landing systems, while Rockwell Collins is a major supplier of avionics and different cabin interior products, the EC noted.

But the Commission investigation raised concerns about reduced competition for trimmable horizontal stabilizer actuators (THSA), certain pilot controls (throttle quadrant assemblies and rudder brake pedal systems), pneumatic wing ice protection, and oxygen systems, it said.

Under the conditional approval, the Rockwell THSA and pilot control businesses, based primarily in the U.S. and Mexico, would be sold, as would its entire global business in ice protection. Meanwhile, UTC’s two oxygen systems “research projects” would be divested.

Aside from those areas, the Commission determined that “other overlaps and vertical links between UTC and Rockwell Collins activities did not lead to any competition concerns,” because enough other competition exists.

The Commission further concluded that a merged Rockwell Collins/United Technologies entity would neither have the market power nor incentives to shut out competitors through practices such as bundling or tying.

But industry analyst Ronald Epstein noted that as the Rockwell Collins/United Technologies merger inches forward, the market is assessing the underlying shift it will cause with the creation of super suppliers. “I think it’s going to be really important to the OEMs in how they partner with suppliers on future aircraft and how the future aircraft are integrated,” said Epstein, managing director in equity research at Bank of America Merrill Lynch.

He noted the expanse of coverage a new “Collins Aerospace” combined entity would have. On Bombardier’s C Series, for instance, he noted that the combined entity will account for nearly 40 percent of the value of the aircraft. “So then you have to scratch your head and say…who’s the OEM?”

These mergers will create super suppliers, which Epstein said are no longer Tier One. Now they are "Tier 0.5," he said. “They can do your engines, they can do your avionics, they can do your control systems, they can do your actuators, you name it. That's an important changing dynamic in the supply chain.”