UTC's Got the Urge to Merge

It's the autumn of the market rally, and merger announcements are piling up like fall leaves. Let's take a romp through the latest.

Hewlett-Packard (NYSE: HPQ  ) 's ill-considered acquisition of 3Com dominates the headlines this morning, but as I explained earlier today, I think it's a bad idea -- and investors should stay away. What's a better idea? Check out United Technologies' (NYSE: UTX  ) purchase of General Electric's (NYSE: GE  ) Security division.

Here's what we know right now:

• Strapped for cash, and carrying the same kind of underperforming financial services division that's hobbled Textron (NYSE: TXT  ) and Harley-Davidson (NYSE: HOG  ) , GE plays the part of "motivated seller" today.
• It's unloading its Security division on United Tech (UTC), selling off GE Security's $1.2 billion annual revenue stream for a mere $1.82 billion -- about 1.5x sales.
• GE Security is part of GE's Technology Infrastructure business, where GE earns a 17.6% operating margin.
• UTC's own Fire & Security division gets only an 8.4% operating margin on $6.5 billion in annual revenues.

Thus, consummating the merger will give UTC about a 7.7% market share of this "$100 billion global fire safety and electronic security industry." Bigger isn't necessarily better, but the deal does promise to add firepower to UTC's rivalry with security players like Honeywell (NYSE: HON  ) and Tyco International (NYSE: TYC  ) . And if you ask CEO Louis Chenevert, adding GE Security to its portfolio will make UTC a better company. He said that buying GE Security "brings additional world class product lines to the UTC portfolio, improves our aftermarket revenue potential and will deliver solid long-term value for UTC shareholders."

How much value?
Chenevert predicts the acquisition won't hurt earnings next year, even after deducting restructuring and transaction costs. By 2011, UTC should already be deriving profits from the deal. Even better for shareholders, UTC is getting the division for a very nice price.

Foolish takeaway
To recap, in one fell swoop, UTC will:

• Increase its Fire & Security revenue stream by 19%.
• Buy what are, in all probability, product lines that earn higher profit margins than its own.
• Do all this without paying much of a premium to its own market valuation.

Sounds like a pretty sweet deal to me.

Unless you're a GE shareholder.

Disagree? Feel free.
Click on over to Motley Fool CAPS and vote for UTC to underperform if you hate the merger, or GE to outperform if you love it.

Motley Fool CAPS: It's fun, it's free, and it just might make you famous.