Industrials

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

An activist investor at United Technologies Corp. is just a matter of speculation right now, but it would hardly be a shock if one did show up.

Shares of the maker of jet engines and air conditioners spiked the most since November amid reports that a hedge fund is buying up the stock and may pressure the company to spin off assets. United Technologies was always a more obvious activist target than well-run rival Honeywell International Inc., which is facing calls from Dan Loeb to separate out its aerospace unit. United Technologies' attempt to acquire avionics company Rockwell Collins Inc. may only have served to put it even more in the spotlight. 

Buy High
Rockwell Collins has long been an expensive stock, but it's only gotten more expensive lately
Source: Bloomberg

The timing of United Technologies' approach has always seemed weird to me. Some have pointed to how General Electric Co., an obvious counterbidder, is sidelined. But GE's issues were largely known last winter when Starboard Value was trying to drum up interest in Rockwell Collins to stop the company's B/E Aerospace acquisition. Rockwell Collins has only gotten more expensive since, and the addition of B/E Aerospace's aircraft interior products  probably didn't do much to boost its attractiveness from United Technologies' perspective. 

So why now? Big acquisitions can be decent distractions when a company's stand-alone story isn't ideal. The rollout of United Technologies' costly new jet engine has been mired by supply-chain issues, technical glitches and delivery delays. A Bloomberg News analysis found a competing product from GE had won 10 times as many orders so far this year for an Airbus SE jet.

Long Way to Go
UTX fell short of its 2016 goal for deliveries of its new GTF jet engine amid supply chain snafus and fixes. It faces a steep ramp in the back half of the year to meet its 2017 target.
Source: Bloomberg
Note: 2017 goal data reflects the midpoint of United Technologies 350 to 400 engine deliveries

United Technologies says it's still on track to meet a goal of 350 to 400 deliveries this year. But it handed over fewer in the second quarter than it did in the first and faces a steep climb to meet that goal. And it's not yet seeing a payoff in its profit. Meanwhile, margins at the Otis elevator business are eroding as United Technologies tries to recapture market share in China. United Technologies' EPS is expected to decline this year, and it's been sort of vague about  how its profitability trouble spots might play out in 2018.

CEO Greg Hayes seems to know that a prolonged "wait-and-see" rebuilding period just isn't going to cut it with shareholders. That’s likely why he committed in 2015 to returning $22 billion to shareholders by 2017. But the effects of that are wearing off, if it ever really could be called a success. For a man who bills himself as United Technologies' own activist, the Rockwell Collins bid could be his next play to get investors enthused about the company again.

Should We Break Up?
United Technologies' aerospace-focused divisions accounted for about half of its revenue in 2016, but a lower percentage of its operating income
Source: Bloomberg

The only way this deal makes sense financially is if it's paired with a breakup of United Technologies. Hayes' argument against a split has been that he needs the cash flow from the elevator and climate-control divisions to fund investments at the aerospace units. A Rockwell Collins deal would make the aerospace businesses better able to stand on their own. But this is all dependent on Rockwell Collins agreeing to a deal, and with its own growth prospects looking strong, it can name its terms.

And what then, Mr. Hayes? Perhaps an activist shareholder would have some ideas.  

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Remember that he also contemplated a takeover of Honeywell before the latter turned the tables on him and tried to be the acquirer.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net