Will United Technologies Corp and Honeywell International Inc Merge?

United Technologies Corp and HoneywellUnited Technologies Corporation (NYSE:UTX) stock saw gains that brought it back to a price not seen since last January. UTX stock gained 4.69% on Wall Street, going well beyond $90.00. It was also one of the main drivers of the Dow Jones Index (DJI). UTX stock had lost more than 28% in the 12 months until last Friday, but if the rumors are true—and evidence suggests they are—UTX could soon merge with Honeywell International Inc. (NYSE:HON). Honeywell gained 2.5% over the same period UTX dropped so sharply.

China’s economic slowdown and reduced infrastructure spending, along with the higher U.S. dollar have raised concerns of a commercial aerospace bubble. UTX is vulnerable. Given the size of the projects it takes on, the perception of future performance tends to be higher for UTX stock investors. The United Technologies group, which owns Otis Elevators, had enjoyed a boom due to sales for Chinese buildings. Likewise, Otis and Carrier air conditioning, another United Technologies unit, won millions in contracts in the Persian Gulf with its construction boom. However, the low oil prices have recently added risk and headwinds against growth. (Source: “Why a Honeywell, United Technologies Merger?Aviation Week, February 22, 2016.)

About a year ago, UTX was the one shopping around for a deal. Now, it has become a target.

UTX’s new CEO, Gregory Hayes, has realized that “industrial recession is spreading and his planned growth is drying up.” (Source: Ibid.) In order to survive, United Technologies will either shed more units, as it did with Sikorsky at Hayes’ behest, or it will find a partner. Honeywell, unlike UTX, had a bullish 2015 and it is in full acquisition mode. The antitrust concerns may turn out to be a temporary obstacle to a UTX and Honeywell merger, which investors would welcome.

A United Technologies Corporation-Honeywell merger would create a group capable of generating more than $90.0 billion in revenue. From an industry perspective, the combined entity would become a one-stop shop for airplane manufacturers. They would supply engines, landing gears, and cockpits for Boeing, Airbus, and beyond. A merger between UTX and Honeywell could allow for the building of a plane from nose to tail with the merged company’s parts. Such is the potential that Boeing and Airbus may object to the emergence of such a colossus on antitrust worries.

According to CNBC, which first reported these negotiations, the discussions are recent. Honeywell made the approach and proposed a transaction that, if realized, would allow UTX shareholders to pocket a bonus: shares and additional cash. The antitrust worries have pushed UTX to stop the talks. (Source: “Honeywell, United Technologies held merger talks but UTX pulled out on antitrust worries,” CNBC, February 22, 2016.) Nevertheless, UTX remains an appetizing morsel in the industrial sector.

UTX already paved that road by selling Sikorsky.

“We think a merger would unlock significant synergies,” said S&P Capital IQ analyst Jim Corridore in a note to clients. (Source: “A Merger Between United Technologies and Honeywell Is ‘Dead in the Water’,” Fortune, February 23, 2016.)

The pressure to consolidate is strong. Like many of its U.S. multinational peers, United Technologies has suffered from the strong U.S. dollar over the past year. In December, the company unveiled a $1.5-billion restructuring plan to reduce costs. United Technologies sold its subsidiary Sikorsky, a helicopter manufacturer, to Lockheed Martin Corp. for $9.0 billion. Honeywell, meanwhile, reduced its workforce and sold or merged some activities to cut its own expenses.

Honeywell will surely not be the last suitor; it could well continue to court UTX. While the sources said the government would not approve a merger of this scale in a presidential election year, dragging the process for months, some analysts believe UTX and HON could reach a deal. Should the two companies agree to some divestitures, they could get the deal done.