United Technologies Corp. UTX, a company where Bill Ackman (Trades, Portfolio) and Daniel Loeb (Trades, Portfolio) established activist stakes in earlier in the year, received the green light to acquire Rockwell Collins Inc. COL according to the U.S. Department of Justice. Despite this, the merger still requires regulatory approval from China.
Per the Justice Department’s ruling, United Technologies agreed to divest two of Rockwell Collins’ businesses: the pneumatic ice protection systems business and the trimmable horizontal stabilizer actuators business. Assistant Attorney General Makan Delrahim said the above divestments ensure that customers “continue to benefit from competition in the supply of these two aircraft components that are critical to safety.”
Ongoing trade war with China looms
Merger arbitrage hedge fund manager John Paulson (Trades, Portfolio) listed seven characteristics of “successful” mergers, including limited regulatory risk. The higher the regulatory risk, the more likely a merger breaks up.
According to CNBC, a Reuters article said the merger is “still waiting approval from China,” a red flag given that Chinese antitrust regulators failed to approve the merger between Qualcomm Inc. QCOM and NXP Semiconductors NV NXPI in July. Qualcomm called off the merger as a result.
CNBC columnist Sri Jegarajah said on Tuesday that the U.S. can direct its focus to China, using trade deals with Canada, Mexico and South Korea as “leverage.”
Target’s profitability remains strong
The Paulson merger arbitrage checklist includes “solidly performing target” as another key criterion of successful mergers.
GuruFocus ranks Rockwell Collins’ profitability 7 out of 10 on several positive investing signs, which include consistent revenue growth. Rockwell Collins’ business predictability ranks three stars out of five; additionally, the company’s operating margin of 17.23% outperforms 85% of global competitors.
Gurus with large positions in Rockwell Collins include Paulson, Jeremy Grantham (Trades, Portfolio) and George Soros (Trades, Portfolio).
Disclosure: no positions.
Also check out:
