What happened

Shares of Raytheon (NYSE:RTN) are down more than 16% on Wednesday, performing significantly worse than most other defense stocks. There is no company-specific Raytheon move, but the shares appear to be falling along side Raytheon merger partner United Technologies (NYSE:UTX).

So what

Last summer, with both stocks flying high, Raytheon and United Technologies announced plans to merge in a deal that would leave both companies better diversified. Combining Raytheon's defense-heavy business with United Technologies' commercial-heavy aircraft engine and interiors business would give Raytheon investors exposure to the ongoing commercial boom, while giving UTX holders a strong military portfolio to fall back on when the commercial cycle eventually turned.

A Raytheon Patriot missile battery firing.

Image source: Raytheon.

The COVID-19 coronavirus pandemic has brought the long-running bull market to a halt, pressuring both defense and commercial aerospace stocks, but commercial-focused businesses have been hit particularly hard on fears that a severe drop-off in travel demand will cause airlines to delay new plane purchases and not need as many spare parts.

Shares of United Technologies traded down more than 20% on Wednesday after Boeing (NYSE:BA) said that without government assistance its entire commercial aerospace supply chain could be pushed to the brink. Given that the UTX/Raytheon deal is all stock, any drop in United Technologies shares puts pressure on Raytheon shares.

Now what

The deal is expected to close sometime early in the second quarter. Given the market turmoil, it is impossible to know for sure, but I've heard nothing to suggest the merger could be in trouble. Assuming it goes ahead, Raytheon shareholders are about to get a lot more exposure to the commercial aerospace market at an inopportune time, which is likely contributing to the sell-off.

RTN Chart

Defense stock data by YCharts

Over the long haul, the combination will create a larger, more diverse company with the wherewithal to thrive in good times and bad. But that is not likely much solace to Raytheon investors being dragged into a difficult situation while other defense stocks have held up (relatively) well.