President Donald Trump isn't overly keen on the competitive landscape in aerospace and defense following the announcement Sunday of a mega-merger between Raytheon (RTN) and United Technologies (UTX) .
Speaking to CNBC on Monday morning, Trump voiced concerns about industry consolidation in the defense sector and what it means for competitively priced Department of Defense contracts.
"Does that make it less competitive?" @realDonaldTrump on potential Raytheon-United Technologies merger $RTN $UTX pic.twitter.com/IwXxHbybeR
— Squawk Box (@SquawkCNBC) June 10, 2019
"When I hear United and I hear Raytheon, which is another incredible company, the missile systems they make are incredible, when I hear they're merging -- does that take away more competition?" he asked. "I have to negotiate, meaning the United States has to buy things. Does that make it less competitive, because it's already noncompetitive."
While Trump called the proposed combined company "beautiful," the potential roadblock of regulatory risk that was previously assumed to be minimal by Wall Street analysts comes into question as the president increases questions on competition and cost control for the new entity.
"We think the DoD is sensitive to contractors amassing significant power but on the military side, Raytheon Technologies will still be significantly smaller than Lockheed (LMT) and doesn't really become any more dominant in specific areas than either company was independently," J.P. Morgan analyst Seth Seifman said prior to the Trump interview. "Chinese approval would obviously be an issue if required but we assume it will not be, since it seems unlikely that Raytheon sells anything there."
UTX CEO Greg Hayes later confirmed that Chinese approval would not, in fact, be a factor in the deal's approval, noting that fewer countries will be involved in the current deal with Raytheon than were party to its deal for Rockwell Collins in 2018.
But scrutiny may end up being a much more pertinent issue domestically than Seifman and other analysts anticipated if Trump's comments hold any water.
Following a rapid run upward for both stocks in pre-market hours, both companies saw shares wane after the open as the interview provided room for caution.
The deal may garner some optimism from the jobs-focused president as both companies committed to hiring thousands of employees to accelerate R&D efforts among other key business aspects.
It is also worth noting that Trump's criticisms centered upon airplanes, a product that neither Raytheon nor United Technologies manufactures directly. Instead, the companies make the products that go into aircraft, such as Pratt and Whitney engines and the electronics that operate airplane systems.
Does POTUS know neither UTX nor Raytheon make planes?
From @CNBC interview this am: pic.twitter.com/C1ByIdkSHf
— Carl Quintanilla (@carlquintanilla) June 10, 2019
Still, the issue of supplier concentration is a pressing one, and one with precedent, even though the proposed new company would not directly manufacture jets like Airbus (EADSF) or Boeing (BA) does.
In fact, United Technologies CEO Greg Hayes cited supplier concentration and regulatory risk as his key motive for rebuffing advances from Honeywell (HON) , which offered to merge with UTX about three years ago.
"Healthy competition in our supply chain is vitally important to Boeing and our commercial and military customers," Boeing said in a statement on the proposed merger three years ago. "As we would with any potential combination of tier one suppliers within the aerospace and defense industry, we would anticipate taking a very close look at the potential impact on us and our customers of a Honeywell-UTC merger or acquisition."
While Raytheon is certainly differentiated from Honeywell in terms of relationships, and won't face the same impact from aircraft manufacturers, the fact that both UTX and Raytheon count a company like Lockheed Martin as a Top 5 customer is sure to draw similar criticism from affected customers.
That is aside from the Defense Department, which is a major buyer for both companies and clearly has comments to offer already.
At the least, the commentary adds credence to calls for caution on the regulatory hurdles remaining and adds yet another variable to the equation as the market eyes integration prospects for the mega merger.
