Tick tock: How Raytheon-UTC megadeal came to be

In media interviews and investor events, Raytheon CEO Tom Kennedy has touted the fact that he was the one to initiate conversations with his United Technologies Corp. counterpart Greg Hayes that eventually led to the announcement of their megadeal on June 9.

That interest on the part of Raytheon to look at a potential combination with UTC’s aerospace and defense businesses evidently came quick, according to regulatory filings posted Friday that lay out near tick-tock details of those initial conversations and subsequent negotiations.

Hayes has been noted in the general business media for his frank support of the idea of smaller, more focused companies as opposed to conglomerates. That includes the February 2018 announcement that UTC would look to spinoff its Otis elevator and Carrier air conditioning businesses in order to become a pure-play A&D systems company.

One month later, Raytheon’s board of directors discussed those very remarks. Two months after that, the board signed off on Kennedy reaching out to Hayes to kick off early conversations about a potential combination of Raytheon and UTC’s A&D businesses.

That phone call initiated by Kennedy took place on June 21, 2018. As noted by those Securities and Exchange Commission filings, Hayes indicated it was “probably not the right time for UTC” to consider a transaction given they were looking at splitting up the company and closing on its acquisition of Rockwell Collins.

But in my reading the filing, Hayes at least sounded intrigued by the concept of the companies coming together or pursuing mutual opportunities of interest. Hayes and Kennedy agreed to arrange an introductory call between both UTC and Raytheon management teams, which then took place on July 11, 2018.

UTC both closed the Rockwell Collins deal and announced the separation plan on Nov. 26. Between that and the July introductory phone call, UTC management stuck to the same message in communications with their Raytheon counterparts: Rockwell Collins and the breakup are our main agenda items.

December saw a breakthrough of sorts from the Raytheon perspective. Kennedy and Hayes discussed the possibility of a transaction, then both companies entered a confidentiality agreement on Dec. 11. UTC’s board met the next day to discuss re-engaging with Raytheon on a potential deal.

As ever when talking about two public companies coming together, one of the main sticking points in the negotiations was how much equity each shareholder base would own in what will eventually become Raytheon Technologies.

The final ratio came out to UTC shareholders owning 57 percent with Raytheon shareholders having the other 43 percent. In March of this year, investment bankers representing UTC proposed a 60-40 ratio in favor of them during a set of preliminary discussions.

Raytheon gradually nudged that balance more in their favor and Hayes proposed a revised ratio in an April meeting that UTC shareholders would own 57.5-58.5 percent. Further discussions on the ownership structure culminated in early June, when UTC’s board signed off on the final 57-43 balance.

Discussions about the roles both CEOs would play in the combined company seemed much quicker by comparison. On April 8, Hayes and Kennedy discussed a preliminary look of the combined board: eight members from UTC and seven from Raytheon.

They also discussed how Kennedy would serve as executive chairman for two years after the close, plus how Hayes would become CEO and eventually add the chairman title after that two-year period. Those terms were agreed upon in late May.