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On Friday, one Fool reader dropped me a note asking: "What is going on with defense stocks today?" I mean, it was a good day for stocks overall. The Dow Jones Industrial Average (INDEX: ^DJI) gained more than half a percent. But defense stocks? They went absolutely haywire.
L-3 Communications (Nasdaq: LLL ) rose a clean 1.5%, more than twice the average gain on the Dow. Boeing (NYSE: BA ) clocked a 1.6% gain. Textron (NYSE: TXT ) nearly 7%. Rockwell Collins (NYSE: COL ) , nearly 8%. What was going on?
As it turned out, the answer was as simple as ABC -- or rather, UTC: United Technologies Corp. (NYSE: UTX ) . As the day progressed, news began filtering out that UTC was revving up a major acquisition in the defense space, lining up bankers to back a $20 billion bid for ... somebody. And investors were laying odds on who the lucky winner of a UTC-led buyout would be.
Winners and losers
Sadly, many investors guessed wrong; UTC was not angling to buy any of the companies named above. After markets closed for the day, we learned UTC was really deep in negotiations to acquire rival aerospace components maker and fellow Boeing supplier Goodrich (NYSE: GR ) . As The Wall Street Journal confirmed over the weekend, Goodrich is at the top of UTC's shopping list, with price being the only remaining sticking point.
Once again, investors are laying odds. After bidding Goodrich shares up more than 7% Friday, arbitrageurs doubled down and added 16% more to the firm's market cap Monday -- and this might not be the end of it. Bloomberg reports that Goodrich shares that fetch $107 and change today could add another $15 before a deal is finalized. If they're right, this would give Goodrich a $15 billion market cap -- not too far off from the $20 billion warchest UTC was said to be filling out last week.
The real loser
For UTC shareholders, though, I hope the news proves false -- because $15 billion is way too much to pay for Goodrich. At $15 billion in market cap, Goodrich shares would be selling for 22.4 times earnings. That's nearly 10 points more than UTC's own shares currently fetch, and a pretty premium to Goodrich's 14% long-term growth estimates as well. While I certainly understand the temptation to pay up for growth, in UTC's case, I have just three words of advice: Resist the temptation. Goodrich costs too much.
Will United Technologies ultimately pay up for Goodrich? And if not them, who else might UTC buy? Add it to your watchlist and find out.