When Greg Hayes took the reins at United Technologies in late 2014, the newly minted CEO said he would pursue huge deals to reshape the industrial conglomerate.

He’s been true to his word, though not without a little pressure from activist investors pushing for a transformation. Since late last year, he has completed the acquisition of Rockwell Collins and announced plans to spin off the Otis elevator division and Carrier air-conditioner business as he narrows the focus largely to commercial aviation.

But it was an inbound call in the middle of last year that set him on course for his biggest deal yet. That’s when Thomas Kennedy, Hayes’s counterpart at defense contractor Raytheon, phoned to suggest that the companies join forces. A combination would give rise to an aerospace and defense powerhouse, the executives envisioned, with complementary product lines and fairly little overlap.

“This had been on our radar screen forever,” Hayes said Monday on a joint conference call with Kennedy. “So the compelling logic was there.”

Engines to missiles

The discussions resulted in one of the industry’s biggest deals ever, forming a manufacturer with about $70 billion in sales and a product lineup ranging from jet engines to missiles, and cockpit electronics to cybersecurity services.

United Technologies shareholders will own 57% of the new Raytheon Technologies when the deal closes next year. The company is expected to be worth well over $100 billion, according to Bloomberg Intelligence.

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Investors weren’t enthusiastic. United Technologies fell 3.1% to $128.01 at the close in New York, the biggest decline on the Dow Jones industrial average. Raytheon climbed less than 1% to $187.19.

“While this deal achieves size and diversification, the economic benefits seem modest,” said Robert Spingarn, an analyst at Credit Suisse Group. “We do not see additional scale that will materially deepen existing moats or enhance competitiveness.”

The tie-up, which the companies billed as a merger of equals, will give United Technologies a hedge against the cycles of the aviation markets, Hayes said. That’s important as the company spins off its elevator and climate-controls businesses.

“More resilient’

“A leading economic rationale behind the merger was that the resulting company would be far more resilient across business cycles due to its breadth and diversification,” said Nicholas Heymann, an analyst with William Blair & Co.

The deal will transform United Technologies from a smaller defense contractor into one of the biggest. About 54% of the new entity’s sales will be from defense, the companies said.

Approval is no sure thing. President Donald Trump said he would be concerned about the combination if there is overlap in the companies’ offerings.

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“When I hear they’re merging, does that take away more competition?” Trump said in an interview on CNBC. “It’s hard to negotiate when you have two companies and sometimes only one bid.”

The U.S. Defense Department said its acquisitions chief was evaluating the merger.

“Under Secretary Ellen Lord is engaging with industry leadership to understand the implications and governance as a result of this acquisition,” Lt. Col. Mike Andrews, a department spokesman, said in a statement. He said the Pentagon looked forward to working with the combined company “to provide the best capabilities our war fighters deserve, at the greatest value to the taxpayer.”

United Technologies and Raytheon overlap in making intelligence and surveillance gear, and reconnaissance payloads for drones.

Regulatory oversight

But there is little other duplication, which “suggests limited regulatory resistance,” Cowen analyst Cai von Rumohr said in a note. Regulatory approval was a stumbling block in United Technologies’ ultimately successful acquisition last year of Rockwell Collins for $23 billion.

United Technologies makes both commercial and military engines, while Raytheon is focused most on defense. On the contracting side, the deal will combine F-35 jet fighter engines made by Pratt & Whitney, a United Technologies division, with Raytheon’s Patriot missile-defense products and expertise in areas such as radars and munitions.

The headquarters will be in the Boston area. Currently, United Technologies is based on Farmington, Connecticut, while Raytheon’s headquarters is in Waltham, Massachusetts.

Deal flurry

The Raytheon transaction crowns a flurry of deal making by Hayes. In 2015, he agreed to sell the Sikorsky helicopter business to Lockheed Martin. The next year, he foiled a takeover bid from Honeywell International. Then United Technologies agreed in 2017 to buy Rockwell Collins, a maker of flight computers and other aircraft parts, closing the deal last year.

As other conglomerates faced pressure from activist investors to narrow their focus, Hayes argued in 2017 that United Technologies benefited from its mix of businesses.

He changed his tone last year as the Rockwell Collins deal advanced toward approval and two high-profile activists — Bill Ackman of Pershing Square Capital Management and Third Point’s Dan Loeb — revealed stakes in United Technologies and stepped up calls for a breakup. Hayes late last year announced plans to separate Otis and Carrier.

Financial outlook

After the Raytheon tie-up, the resulting company will have combined debt of about $26 billion, with about $24 billion of that coming from United Technologies, the companies said in a statement. There is no change to the 2019 financial outlook for either company.

The companies said they expect to return $18 billion to $20 billion to shareholders in the first 36 months after the merger and to see about $1 billion in annual cost savings by the fourth year.

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Greater heft would enhance the ability of United Technologies to withstand cost pressures from customers such as Boeing and Airbus, said Douglas Rothacker, an analyst at Bloomberg Intelligence.

“Aerospace suppliers have been, and will continue to be, under immense pressure from Boeing and Airbus to cut costs,” he said. “We’ve seen consolidation in the sector as a way to counter these pricing and competitive pressures, and also to diversify to add revenue streams.”