The Proposed Raytheon/United Technologies Merger Underscores Benefits of Innovation

The Proposed Raytheon/United Technologies Merger Underscores Benefits of Innovation
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Corporate mergers have been on an upswing in recent years, and the pace appears to be growing. In the first half of last year alone a record $2.5 trillion in mergers were proposed. And this is a good thing.

It’s no accident that mergers are increasing as our economy continues to transform through technology, which itself is driven by corporate investment. Tech has been a key driver of current economic growth -- likelyeven greater than we’ve been able to measure -- but the spending on research and development needed to bring new innovations to market is frequently risky, costly and complex. This has spurred the trend of like-minded enterprises choosing to join forces, to consolidate fixed-costs while combining complimentary resources and innovative energies. Mergers have played an indispensable role in enhancing economic growth while strengthening our global competitiveness and creating a better standard of living for consumers.  

In many cases a merger is not just merely an option on the table, but an imperative for survival. One current merger proposal that highlights this reality is the plan to join defense contractor Raytheon and aerospace leader United Technologies. At a time when defense contractors are facing ever greater demands from the Pentagon, every competitive advantage helps; and this merger checks all the boxes. It combines two companies with complimentary assets that can develop new technologies faster and cheaper. By scaling fixed costs, such as research and development, the unified company will be vastly more efficient and better poised for growth. But beyond concerns of mere survival the merger is of paramount importance for even more urgent reasons.

Consider two recent headlines; China outlining a plan toweaponize space to confront the U.S., and Russia’s announcement that by next year it will have ahypersonic missile that can be deployed by aircraft. Whether these declarations amount to dictatorial hubris or are just designed to stir domestic fervor, the fact remains that both nations are ramping up spending on military technology and are quickly closing the gap with the U.S. Russia is now the world’s second largest arms producer and China is building aircraft carriers to patrol the waters.

Thankfully, America is no slouch when it comes to developing cutting-edge technology and driving innovation. But the world is catching up. In 1960 America’s defense related research and development accounted for 36 percent of all research spending globally, but was a mere 4 percent in 2016. This trend will not give many Americans peace of mind in an increasingly unsafe world.

Despite military spending getting a boost under President Trump, budgetary constraints and national security imperatives demand maximum return on defense dollars, meaning high-impact technologies and fast turnaround. A combined Raytheon and United Technologies is designed to deliver just this kind of integrated capability. At a time when commercial tech companies are rushing to merge or acquire proprietary technologies, it makes infinite sense that our national defense keep pace through partnerships in innovation. In fact it demands it.

Given that dark clouds always seek out silver linings, it comes as no surprise that the merger is now under assault by activist investors seeking short-term profits. Hedge fund investors Bill Ackman and Daniel Loeb hold United Technologies stock and are kicking up dirt to turn a short-term profit at the expense of long-term growth and a more pronounced direction for the merged company. So far they’ve been making ludicrous antitrust allegations based on zero facts, but this is what they’re known for; squeezing healthy companies to the bone, slashing research budgets and selling the remaining pieces for a profit, though often their hatchet work results in losses.

Investor actions most often are largely internal in nature, but this isn’t about sneakers, shampoo, streaming video or snack foods. The Raytheon merger concerns a company that may well prove critical to America’s national security being whacked like a profit piñata so a small minority can scoop up whatever cash falls out. It’s a bad deal for the majority shareholders invested in the company’s larger vision and an affront to stakeholders committed to America maintaining her position as a world leader in critical technologies. It’s also a dangerous precedent as more defense and technology companies seek merger agreements.

Continued advancements in technology are indispensable to our economy and national defense, and timely corporate mergers are now a major driver of critical innovation. Deals like the Raytheon, United Technologies merger represent a way forward for companies in challenging markets, to the benefit of long-term investors and our nation as a whole. It would be a shame to witness these developments scuttled for an elusive short-term benefit.

Gerard Scimeca is an attorney and vice president of CASE, Consumer Action for a Strong Economy, a free-market consumer advocacy organization.

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