Investors in Raytheon Technologies (RTX -0.11%) should mark June 19, the date of the Paris Air Show. That's when Raytheon's management will hold an investor-day event at the show where it has promised to announce plans for potential synergies for its business realignment. If history is anything to go by, it could be a game-changing announcement.
Raytheon's business realignment
At the end of January, management announced a plan to restructure its four segments into three. The company is a creation of the merger of the two former commercial aerospace businesses of United Technologies (Pratt & Whitney and Collins Aerospace) and the two defense businesses of the former Raytheon Company: Raytheon Missiles and Defense (RMD) and Raytheon Intelligence & Space (RIS).
They have operated as four separate segments, but management plans to create three segments: Pratt & Whitney, Collins Aerospace, and Raytheon.
It's not simply a matter of merging RIS and RMD to create a Raytheon segment, because parts of RIS, RMD, and Collins will be "appropriately aligned from a technology and a customer standpoint," according to CEO Greg Hayes on the last earnings call.
Why the realignment matters
The change to the business portfolio opens up opportunities for management to generate two types of synergies: cost and revenue.
Cost synergies are a result of combining businesses with complementary functions; for example, there might be no need for two head offices or to share a factory.
Revenue synergies involve the ability to generate more sales as a combined entity. These take longer to develop, which is why most managements focus on outlining cost synergies as the rationale for a merger.
The realignment should lead to a combination of cost and revenue synergies, leading to greater profitability.
Raytheon has an excellent record on cost synergies
The industrial company's management has a superb record of wringing cost synergies out of mergers. For example, United Technologies bought Goodrich in 2011, planning to generate $350 million to $400 million in cost synergies only to end up with $600 million.
It then bought Rockwell Collins in 2017, planning for $500 million in cost synergies, only to generate $600 million by 2022, with a target of $1 billion by 2025.
Lastly, the merger with Raytheon Company had an original target of $1 billion in cost synergies, only to reach $1.4 billion by the end of 2022, with management now aiming for $1.5 billion.
It's a track record that suggests investors should be optimistic about what management could announce.
Image source: Getty Images.
Revenue synergies coming
As noted earlier, revenue synergy takes longer to develop, but investors also have a reason for optimism. At a recent Barclays (BCS 1.52%) conference, Hayes said: "We think we've identified roughly $12 billion of revenue synergy opportunities that we can realize through this realignment. Today, we've only realized about $1 billion of that $12 billion."
Hayes highlighted two areas as examples: Joint All-Domain Command and Control (JADC2) and radar and avionics for the Federal Aviation Administration (FAA). JADC2 is the concept whereby all branches of the military will contribute data to an integrated network managed by artificial intelligence. Raytheon has teams working on it at RIS and Collins, according to Hayes. Meanwhile, the FAA work is also currently spread across Raytheon's businesses.
A game changer
All told, it's probable that management will announce some targets for cost and revenue synergies during the investor conference at the Paris Air Show, which will add upside potential to the company's earnings.
Moreover, with Raytheon Technologies set to continue benefiting from a resurgent commercial aerospace industry and increased orders in defense, the future continues to look bright.
