Revisiting the United Technologies-Goodrich Merger

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It is about time to revisit the merger of United Technologies (NYSE: UTX) and the Goodrich Corporation (NYSE: GR) that was announced last year. This merger of giants is going to be the largest acquisition that United Technologies has ever made. There are some good long term aspects to this merger for United Tech we should take a look at.

Expansion of the Aerospace Division

Global growth in the aviation and defense industries is set to slow down this year. Civil aerospace segment is expected to grow at a faster pace than the defense segment. It is estimated that by the end of 2027, the world’s airlines will take delivery of 29,400 civil airplanes with total value of US$ 3.2 Trillion to keep pace with the growing demand for air travel. United Technologies’ presence in the civilian aerospace market will grow extensively because Goodrich works with Boeing’s 787 Dreamliner and Airbus’ A320neo. Commercial aviation in Asia is going to be growing quite a bit in the years to come and this will help United in the merger. Pratt & Whitney, the aircraft engine unit of United Technology Corp., expects sales to double by the end of the decade to $24 billion and that alone will keep business coming from the aerospace division.

Increased Debt

The merger will create another avenue of debt for United Tech as it assumes $1.9 billion of Goodrich’s debt. And this will drive United Tech to focus on cost cutting to a period of time to deal with the new debt issue. As it ingests the new debt, it will have to cut back on M&A for a few years. Part of the plan will be to cut the budget here by $1 billion for a couple years. Working together, the merger United should be able to generate $350 million to $400 million a year in cost savings. Analysts may become a bit more cautious when it comes to credit for the company in the short term, but it should not have a long term negative affect upon the company.

Long Term Benefits

The deal is not expected to close until mid-2012, and may not boost United Tech's earnings for another two years after that. Together, the companies will generate $66 billion in revenue this year. Based on 2011 estimates, the purchase adds sales of about $8 billion a year. But the benefits will not be felt or experienced right away. This is a long term investment. Between the cut back in spending and paying off the new debt it is taking on, it will be some time before any significant numbers can be seen on the books that will make the merger look good. The powers that be know this is a long term investment for United Technologies.

Analysts know this is a long term strategy for United Technologies and look favorably on it. Argus upgrade United to a buy. Deutsche Bank raised their price target on shares of United Technologies from $89.00 to $94.00 April 11th. The Jefferies Group raised their price target on shares of United Technologies from $90.00 to $96.00 clear back in mid-March. Analysts believe the company will grow after the acquisition is complete and a strong aerospace sector will be supported by slow steady growth in the construction fields. United Technologies will prosper from its merger this year with Goodrich. Long term investors, be patient and watch what happens!


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