As Wall Street digested the deal announced Sept. 4 for United Technologies Corp. to buy Rockwell Collins, one number in particular grabbed the attention of the media and analysts.

UTC agreed to pay $30 billion for Rockwell Collins, the global avionics manufacturer based in Cedar Rapids, earning it the title of the largest aerospace acquisition in history by The Wall Street Journal.

The offer of $140 per share for Rockwell was an 18 percent premium over the company’s trading price before news of the deal broke in August, and drew criticism from some analysts that UTC was overpaying. 

The Connecticut-based conglomerate expects to borrow about $15 billion of the purchase price, possibly paying off the debt by selling off other business units, and earned some minor credit rating downgrades as a result.

For Rockwell shareholders – most of them large institutional investors – it felt more like Christmas. They would be able to sell their stock for 67.7 percent more than it was worth on Oct. 24, 2016, right after Rockwell Collins announced its own $8.6 billion acquisition of B/E Aerospace.

UTC CEO and Chairman Greg Hayes said the strategic benefits Rockwell Collins could bring made the price worth it.

“When you’re buying beachfront property, I think it’s a pretty good deal,” Hayes said on CNBC’s “Squawk on the Street.”

Another number may be more important to Rockwell Collins employees and shareholders, however: $500 million. That’s UTC’s estimate of the cost synergies expected to result from the merger in the fourth year after it is finalized and Rockwell Collins is reorganized into a new Collins Aerospace Systems business unit, to be run by Rockwell Chairman and CEO Kelly Ortberg.

Cost synergies are the gravy that Wall Street analysts savor from big mergers, and can come from things like combining headquarters, closing or selling excess factory space and trimming sales forces. But a number of academic studies find that big mergers usually fail to deliver the benefits promised to shareholders through higher earnings and stock price performance.

“The question is, are the synergies great enough to justify the price being paid?” said Amrita Nain, a University of Iowa associate professor of finance who has reviewed the literature and published some of her own studies on the outcomes of acquisitions and mergers.

Nain said acquisition synergies include both cost synergies and revenue synergies. She described the latter as “2 + 2 = 5” enhancements that can come from things like cross-selling products, or innovations that combine the advantages of products from both companies. Those synergies tend to be more difficult to quantify and achieve, Nain said. In fact, UTC did not try to quantify them in announcing the merger.

In such large company mergers, Nain said most do not produce the big shareholder advantages promised. Roughly 20 percent are significantly harmful to shareholder value, and about 60 percent result in no significant change, despite the oft-promised improvements. When they fail to boost shareholder value as promised, she said, it’s usually because the synergies they expected weren’t realized.

A synergy shortfall could affect Rockwell Collins shareholders because one-third of their payment for the deal will be in UTC stock, Nain said. It could become an issue for employees if the synergies in expected areas don’t materialize, forcing UTC to look for other ways to reduce costs.

In a conference call with analysts on Sept. 5, Hayes expressed confidence that UTC can achieve its synergy target through a reduction in public company and SG&A (selling, general and administrative) costs, greater efficiencies in procurement and increased productivity in factories.

The acquisition “is not about closing a lot of factories,” Hayes said during the CNBC interview – a theme reflected in a statement that came directly from Rockwell Collins.

“United Technologies' announced acquisition of Rockwell Collins is expected to have minimal impact on the company's overall presence in Iowa,” read the statement, released through spokesman Josh Baynes. “The majority of jobs in the state are driven by design, engineering and manufacturing of our products and systems, and there is virtually no overlap between our work done in Iowa and UTC's portfolios.”

The overlap is “only a couple hundred million dollars” of product sales, Hayes told analysts. He compared that to the $8 billion to $10 billion in product overlap that would have occurred had UTC gone through with a merger of Honeywell International the two companies discussed last year.

Rockwell Collins said it does expect some job-related impacts due to it no longer being a separate public company, but said the overall impact should be minimal.

History as guide
For an example of what cost synergies could look like in UTC’s Rockwell deal, one can look to a similar acquisition it made five years ago.

In 2012, UTC paid about $18.4 billion to acquire Charlotte, N.C.-based Goodrich, a maker of aerospace systems such as landing gear, aircraft wheels and brakes. The company had 27,000 employees, compared with about 30,000 at Rockwell Collins.

UTC initially projected it would harvest $400 million in synergy savings from the merger, a target later raised to $500 million and achieved ahead of schedule by the end of 2015. 

Those savings took place over a period of years and came from many areas of the business, but some of them resulted from job and plant reductions, and not all came from the Goodrich side of the business.

The Hartford Business Journal reported in August 2012 that UTC planned to lay off 150 salaried employees in its newly formed UTC Aerospace Systems division, following the combination of its Hamilton Sundstrand subsidiary with Goodrich.

About 70 were to come from the roughly 4,000 positions at a former Hamilton Sundstrand location in the Connecticut city of Windsor Locks. The company also said it was closing an intelligence, surveillance and reconnaissance equipment facility in Ithaca, N.Y., and moving some of the jobs to a UTC facility in Danbury, Conn.

Some job cuts had already been in the works at both UTC and Goodrich before the acquisition, but they weren’t over, and rippled into succeeding years. A few were significant enough to make headlines, and just last year, 150 jobs were eliminated at a UTC Aerospace Systems plant in Albuquerque, N.M.

UTC did not respond to an interview request, referring all questions to Rockwell

Not all the news was bad for the communities where Goodrich had operations. Charlotte landed the new UTC Aerospace Systems headquarters, and welcomed about 75 employees from Connecticut, according to Aerospace Manufacturing & Design magazine. UTC received an incentive package that included a $2.5 million grant from North Carolina, $2.5 million in local government grants, and up to $16.5 million in additional state grants over a 12-year period contingent on job and investment targets.

Exactly where the Collins Aerospace Systems headquarters will be located after the merger of Rockwell Collins with UTC's Aerospace Systems division is undecided, Rockwell Collins said in its statement, and will be determined over the next several months.

Nain said the delivery of the synergies will be one of the most closely watched aspects of the UTC-Rockwell Collins deal, especially given the high price UTC is paying for the company.

“Synergies for cutting costs are easiest to put a number on and argue in favor of,” Nain said. “If you have two companies in a very similar market, you might have a lot of redundancies to eliminate.” 

UTC and Rockwell Collins don’t make the same products, however, making it less likely that UTC can save a lot of money by doing things like consolidating production into fewer factories.

“Clearly, United Technologies has something else in mind,” Nain said, mentioning possibilities like gaining market clout to get better volume pricing from suppliers, or to be in a better position to bargain with big customers like Boeing and Airbus.

Turbulence ahead
As is often the case, the UTC-Rockwell Collins merger announcement came out
sounding like a fait accompli, subject only to regulatory approvals such as antitrust reviews, and a vote of Rockwell shareholders.

In reality, the deal could still have to navigate some turbulent skies before reaching a safe landing. Some of the very customers UTC says the deal will help are not quite convinced, and that could spell trouble during antitrust reviews.

Boeing, Rockwell’s largest customer, said it intends to “take a hard look” at the
proposed combination. 

“Until we receive more details, we are skeptical that it would be in the best interest of – or add value to – our customers and industry,” Boeing said in a statement. “Our interests and those of our customers, employees, other suppliers and shareholders are in ensuring the long-term health and competitiveness of the aerospace industry supply chain. Should we determine that this deal is inconsistent with those interests, we would intend to exercise our contractual rights and pursue the appropriate regulatory options to protect our interests.”

Boeing added the first priority of both UTC and Rockwell Collins “should be delivering on existing cost, schedule and quality commitments for their customers and ours.”

Airbus expressed no particular enthusiasm for the merger in a statement, but wasn’t outwardly skeptical, either. 

“Today, our total focus is on delivering planes and we hope that this M&A would not distract UTC from their top operational priority,” said an Airbus statement. 

CBJ Senior Business Reporter Dave DeWitte has previously provided contractual services for Rockwell Collins.