What's going on?
$100 billion American industrial conglomerate United Technologies announced plans late on Monday to split itself into three separate companies.
What does this mean?
The company just completed its acquisition of aircraft parts maker Rockwell Collins for $23 billion – and that’ll stay part of the new slimmed-down United, along with its Pratt & Whitney aerospace business. United’s elevator business, Otis, with annual sales of $12 billion, and Carrier – its heating and air conditioning segment, with sales of $18 billion – will become separate “spun-off” companies.
Why should I care?
For markets: Split up, United might avoid “doing a General Electric”.
In choosing to rend itself asunder, United’s following the advice of activist investor Third Point (also busy this week at Campbell Soup). The activist shareholder believes that splitting the company up will unlock $20 billion of value at United, some of which it might be able to use to reduce its $40 billion pile of debt. The fate of United’s major rival General Electric has served as a warning – it’s had to stop paying a dividend and appears to be rushing its own slimming-down process in order to raise fast cash and keep the wolf from the door.
The bigger picture: Dry powder at the ready.
Smaller companies are more likely to be taken over than sprawling conglomerates – they typically cost less, for one thing. Otis might be of interest to private equity investors, who currently have $1.7 trillion of cash sitting on the sidelines waiting to be spent. When elevator companies make a sale, they can look forward to a long, reliable stream of revenue from regular servicing – making them an attractive target. And a post-split United might also be appealing to a customer or competitor. Companies in the aerospace industry have been more open to collaboration of late: Boeing has been acquiring smaller players; and some $25 billion was spent in the first half of 2018 on aerospace and defense deals.