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UTC's M&A reinventions

by Lou Whiteman  |  Published November 19, 2012 at 1:50 PM
United Technologies Corp. has spent the better part of its 80-year existence using M&A to reinvent itself.

What is now known as UTC was formed in the 1930s, when, in the wake of an air mail scandal, legislation was passed that required the United Aircraft and Transport Corp. to divest its Boeing Airplane Co. and United Air Lines Transport Inc. units, forever separating airlines from their suppliers.

In the decades that followed, the parts that remained, such as Pratt & Whitney engines and Sikorsky helicopters, grew to include Otis Elevator, Carrier Refrigeration, Sundstrand Corp. and Chubb Security plc, creating a conglomerate focused not just on aerospace but on building products, energy, pumps and controls as well. In all, UTC did 72 deals for a total of $22.6 billion between 2007 and 2011, according to Dealogic data. More recently in September, UTC made history with its $18.5 billion acquisition of Goodrich Corp. -- the largest aerospace industry acquisition on record. It completed the deal this July after selling off assets, including Goodrich Corporation pump and engine control systems and electrical power systems, to comply with a Department of Justice ruling. As part of a portfolio reshuffling, and to help raise money for the Goodrich purchase, UTC has sold other assets, including its rocket engine and wind power businesses, Clipper Windpower and three Hamilton Sundstrand units.

"M&A is a core competency of UTC," said Dino Mauricio, a veteran private equity and General Electric Co. dealmaker who is now a partner at Stamford, Conn.-based Schaffer Consulting LLC. The divestitures, Mauricio noted, are a sign the company has a grasp on how to use M&A for value creation and to generate income, and not just "acquisition for acquisition's sake."

Far from a deal for the sake of a deal, Goodrich, according to one analyst, is "textbook United Technologies." The company throughout its history has used M&A to establish a platform and use it to bolt on deals. Over the past decade UTC built what is now a $5.5 billion fire and security business by first acquiring Chubb in 2003 and then adding assets, including Kidde plc and GE Security, in the years that followed. Now, in buying Goodrich, the company is shifting its focus to growing its aerospace unit.

"They generate extraordinary cash flow and invest that cash in areas where they can achieve economies of scale that smaller companies cannot fathom," the analyst said.

The Goodrich purchase, UTC's largest to date, marks a return to the company's aerospace roots and is part of a broader push toward higher-growth sectors. Industry sources said last fall before the Goodrich deal was announced that UTC had been seeking a large purchase for some time, but had been frustrated by the choice and price of what was available.

Managing M&A and divestitures at United Technologies is a relative newcomer to this job, Matthew F. Bromberg, who took over as vice president for corporate strategy and development after William M. Brown left to be CEO of Harris Corp. in October 2011. Bromberg, a one-time Goldman, Sachs & Co. associate, has been with UTC since 2002, moving up the ranks at Pratt & Whitney before serving as a vice president of the company's Hamilton Sundstrand unit from 2009 to 2011. Though he assumed the role after Goodrich was announced, Bromberg has been busy managing the slew of divestitures that have coincided with the purchase, including the company's July sale of its pumps business to Carlyle Group and BC Partners Ltd. for $3.46 billion, its October sales of an electrical power systems unit to Safran SA for $400 million and a pumps business to TransDigm Group Inc. for $236 million. UTC did not make Bromberg available for this article.

Despite its strong deal track record, observers say they'll be watching closely to see how fast and nimbly UTC moves as it integrates its biggest deal yet. Consultant Joe Aberger cautions that the company needs to move fast because "disappointing deals, especially high-priced ones, correlate highly with slow consolidation."

The company billed its Goodrich purchase as a long-term investment, based on an anticipated upswing in demand for commercial aircraft. But Aberger, president of Dallas-based merger integration consulting firm Pritchett LP, said that "they need short-term victories to build employee confidence" and to prove to investors the price tag was justified. "If they don't show some results quickly, Wall Street will punish them," Aberger warned.

Early indications have been encouraging. UTC on Sept. 7 reaffirmed its initial 2012 guidance and said strong cash flow generation along with proceeds from divestitures would allow it to pay off about one-third of the $10.9 billion in debt it assumed from the Goodrich deal by year's end. Chairman and CEO Louis ChĂȘnevert on Oct. 23 said that the integration "is off to a good start," updating guidance to predict just 10 cents per share of earnings dilution from the deal in 2012 compared to a prior estimate of 20 cents per share.

UTC on Nov. 6 prepaid $1 billion of a $2 billion facility it had used to finance part of the cash portion of the Goodrich purchase price.

Adding to the challenge is UTC's decision to keep its new Goodrich unit headquartered in Charlotte, N.C., necessitating a move by some high-ranking UTC employees. "Relocation can cause unhappiness on both sides of the deal," Aberger warned. "There can be difficult retention issues if people decide the move isn't right for them."

Another concern, according to Schaffer's Mauricio, is the long-term impact Goodrich will have on UTC's overall business mix. Aerospace firms generally trade at a lower multiple than UTC, which has benefited from its exposure to different industries that have helped shield it from cyclical trends. But with the Goodrich deal and existing businesses such as Pratt & Whitney, aerospace will account for more than half of total company sales.

UTC has outpaced stock indices over the past decade, gaining an impressive 157% from Nov. 8, 2002, through Nov. 12, 2012, compared to a 59% gain for the S&P 500 and a 56% gain for the Dow Jones Industrials. Analysts credit UTC's outperformance in large measure to its ability to fold in acquisitions, cut costs and take advantage of economies of scale as a large conglomerate. Goodrich is a chance for the company to prove that its formula still works, Mauricio said, and that it is able to use its resources to successfully make opportunistic bets in sectors where it sees growth.

Observers will be watching closely in coming months to see if UTC can prove that it can sustain its altitude as it works through its latest transformation.

Tags: BC Partners Ltd. | Boeing Airplane Co. | Carlyle Group | Carrier Refrigeration | Chubb | Chubb Security plc | Clipper Windpower | Department of Justice | Dino Mauricio | GE Security | General Electric Co. | Goodrich Corp. | Hamilton Sundstrand | Harris Corp. | Kidde plc | Louis ChĂȘnevert | Matthew F. Bromberg | Otis Elevator | Pratt & Whitney engines | Pritchett LP | Schaffer Consulting LLC | Sikorsky helicopters | Sundstrand Corp. | TransDigm Group Inc. | United Air Lines Transport Inc. | United Aircraft and Transport Corp. | United Technologies Corp. | William M. Brown

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