Split Up Announced By One Of The Last Remaining US Conglomerates

One of the oldest and last standing conglomerates of the US, the 84-year-old United Technologies which manufactures elevators and jet engines will be split into three parts.

Its Carrier building systems business and its Otis elevator division would be separated by the company into stand alone units, accounted the company on Monday. Jet engine maker Pratt & Whitney and parts maker Rockwell Collins, which has been newly acquired, would comprise the rest of the company and would be completely focused on aviation business.

United Technologies is one of America’s last great industrial conglomerates and its split will mark the end of the conglomerate. Established in 1934 with the name United Aircraft Corporation, UTC has been an important member of the Dow Jones Industrial Average.

“Our decision to separate United Technologies is a pivotal moment in our history,” UTC CEO Gregory Hayes said in a statement on Monday.

The conglomerate model of business is not liked by investors. The model has been exemplified by General Electric (GE) and at one point in time manufactured a very large number of products starting from movies and microwaves to mortgages and MRI machines. That company is now going ahead fast to split its business in order to pay up the huge debts that it has accumulated because of mistimed acquisitions.

Analysts at one point in time were in favour of the combination of dissimilar businesses under one administration and hoped that benefits such as shared sales teams, more attractive financing and diversification would help such large conglomerates to combat bad times in the economy.

However, in recent years, conglomerates have fallen out of fashion for Investors because of the issues in valuing these large and diverse companies.

For example, investors would find it more attractive to invest in UTC’s aerospace business compared to its heating and air-condition business brand Carrier. This is the reason that UTC has been under pressure to break up its businesses by activist investors.

“The company has been more hampered by its model than it’s been helped,” said Jim Corridore, an analyst at CFRA Research. “It makes a lot of sense for United Technologies to break itself up.”

the resources, flexibility and visibility to be successful would be present for the three companies following the split up, UTC said.

“I’m confident that each company will continue our proud history of performance, excellence and innovation while building an even brighter future,” Hayes said.

A tax-free spinoff of the Otis and Carrier businesses to existing shareholders would be the format for the split. The announcement of the division of the company is time with the completion of the $23 billion deal for acquisition of Rockwell Collins, which was announced in September 2017. China gave regulatory approval to the deal last week.

There was a drop of almost 6 per cent in the shares of UTC following the announcement of the breakup. There can be some frustration among investors over the announcement of the company that the split up can only be completed by 2020, Corridore said.

(Adapted from AmericanMachinist.com)


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