The planned merger of Raytheon Company and United Technologies Corp. to create an aerospace giant does not pose significant antitrust concerns and, instead, could increase both innovation and competition in the defense and commercial aircraft industries.
The combined entity, to be known as Raytheon Technologies Corp., would bring together state-of-the-art hardware and technology from the defense and commercial aviation industries.
In a statement, United Technologies Chairman and CEO Greg Hayes said that both companies, which share a long history of innovation, will have “unsurpassed technologies and expanded R&D capabilities that will allow us to invest through business cycles and address our customers’ highest priorities.”
Hayes, who will become CEO of Raytheon Technologies, also stated the combination of the two companies would “provide technology solutions to our aerospace and defense customers that nobody else could provide.”
Such a bold prediction may or may not be fully realized, but erecting a regulatory competition barrier at this stage of the transaction would not be advisable.
The only direct overlap in business between the two parties amounts to about $80 million, or 1 percent of the overall projected revenues of $74 billion. This overlap could be dealt with expeditiously by the two companies and regulators.
The transaction actually has pro-competitive features, one of which is to introduce Raytheon and its sizeable research and development (R&D) to the commercial aerospace market.
The combined entity would be a strong competitor, second only to Boeing and its acquisition of Embraer, which now has about $100 billion of revenues. Lockheed Martin is third with about $54 billion in annual revenues. Globally, Raytheon Technologies would be larger than Airbus.
On the defense side, Raytheon Technologies would compete head-on with Lockheed Martin and others, such as in the U.S. Department of Defense’s hypersonic missile program.
This transaction, like so many others, is driven by technology. Raytheon CEO Tom Kennedy, who will become executive chairman of the combined entity, said, “Technology is a foundation for the entire company, and then upon that we build a commercial business and a defense business.”
Antitrust regulators in Washington will certainly be interested in how the Pentagon, as the primary U.S. defense customer, will react to the proposed merger. In the late 1990s, the U.S. Department of Defense opposed Lockheed Martin’s plan to acquire Northrop Grumman.
Key in this merger will likely be the new company’s commitment to increasing R&D and the extent to which synergies and efficiencies yield lower costs for the U.S. Defense Department.
If the R&D math only combines what Raytheon currently spends with United Technologies’ R&D budget, then that would not reflect what is being promised in this deal. Rather, technological innovation by the combined firms should increase R&D beyond a simple sum of existing activity.
A related concern of the antitrust regulators will be the extent to which the merged firm will commit to enhanced innovation, especially in the areas of defense, including the design and production of new weapons systems and cyber protection for aircraft.
Antitrust proponents who believe “bigness means badness” may speculate that the merged entity could quell competition in related markets, affecting the likes of Rolls Royce and General Electric.
However, these proponents must readily acknowledge the long-standing and judicially accepted concept that competition, not isolated competitors, should be and is the focus of antitrust enforcement.
If an individual competitor will have a harder time competing going forward, that firm may simply seek the same type of strategic realignment that compelled Raytheon and United Technologies to join forces.
Moreover, in a megamerger such as this one, there are no published enforcement guidelines that provide empirical evidence that “bigger” actually means “worse.” The antitrust division of the U.S. Department of Justice most recently learned this lesson in its ill-advised decision to challenge the AT&T-Time Warner merger.
The outcome of that very expensive legal challenge — with the appeals court rejecting Justice’s attempt to block the merger — was predictable. A similar challenge to the Raytheon-United Technologies merger would likely end in the same result.
Instead, the regulatory focus should be on holding the parties to their word that technology and innovation motivate this transaction. If that occurs, customers will greatly benefit.
The U.S. merger enforcement policy and framework is immune from political influences and non-substantive, value judgments.
The recently tabled Fiat Chrysler-Renault proposed merger shows what happens when a government competition review process places quasi-political factors over traditional industrial organization principles.
The U.S. antitrust regulatory review process should not yield to the same type of external pressures, and therefore the Raytheon-United Technologies deal should be permitted to proceed.
Mark McCareins is a clinical professor of business law in the Strategy Department where he teaches courses on antitrust and competition at the Kellogg School of Management at Northwestern University.
Note: McCareins also serves as general counsel of the Metals Service Center Institute.