United Technologies (UTX) is the largest provider of technology goods and services in the world. The company recently announced plans to split into three separate entities: Otis, Carrier, and Pratt & Whitney. The breakup is seen as a strategic move to unlock value in each of the three divisions.
At present, the company’s shares are trading at $139.32, significantly below its 52-week high of $160.59 set on October 1, 2018. The stock has since been under pressure due to investor concerns that the dividend won’t survive the restructuring process and there will be too few cost savings to justify the break-up.
In this article, we will discuss why United Technologies’ breakup should unlock value, the potential benefits and challenges, and how investors can use this transaction to their advantage.
What Are the Benefits of the Breakup?
The main benefits of the breakup are:
- Reduced Complexity
United Technologies’ businesses are complex and highly interconnected. By separating Otis, Carrier, and Pratt & Whitney into three distinct entities, United Technologies will be able to operate more efficiently and focus more intently on each sector’s specific requirements.
- Increased Focus on R&D
United Technologies’ breakup will result in increased focus on research and development (R&D). Each entity will be able to concentrate on research and development that is specific to their sector. This will, in turn, lead to improved products and services.
- Improved Cash Flow
By separating the divisions, United Technologies will be able to streamline its operations, which will improve its cash flow. Cash flow is essential for companies to invest in R&D, build new products and services, and pay dividends to investors.
- More Attractive to Investors
The breakup will make the company’s divisions more attractive for investors. Currently, the company’s shares are facing downward pressure due to investor concerns, but the breakup should allow the company to tap into different pools of capital and attract a whole host of new investors.
Potential Challenges
United Technologies’ breakup is not without its challenges. The main challenge is the cost of restructuring the three separate entities. Separating and divesting business units can be a long process that requires significant and costly resources.
- Potential Loss of Synergies
The breakup will likely result in the companies losing out on potential synergies that could have been achieved by operating as one unified entity. For example, Carrier and Otis are both significant players in the global aviation market, and the breakup could mean that the two entities lose out on potential cross-marketing opportunities.
- Risk of Overlap
The three companies will also be competing in the same markets and offering similar services. This could lead to significant overlap between the entities and result in significant price competition, potential customer confusion, and possibly a loss of market share.
- Unforeseen Costs
The breakup could result in unexpected costs, such as costs associated with separating the entities from each other, firing certain employees, and divesting unwanted assets. All of these additional costs could put a strain on the companies’ bottom lines.
How Investors Can Benefit
The breakup of United Technologies should be seen as an opportunity for investors to capitalize on the unlocking of value in each of the three divisions. Investors should look at the transactions as a way to reinvest and diversify their portfolios.
- Identify Value
Investors should take the time to identify which division or entity is likely to unlock more value and become more profitable. Analyzing the growth potential of each division can help investors decide where to invest their capital.
- Risk-Adjusted Returns
Investors should also be aware of the risks associated with each division and its corresponding rewards. This can help investors evaluate the potential returns on their investments, given the risks associated with each entity.
- Diversification
The breakup should also be seen as an opportunity to diversify portfolios. By investing in each of the entities, investors can spread their risk and capitalize on the different opportunities available in each entity.
United Technologies’ impending breakup is expected to unlock value in each of the three divisions. The move should result in reduced complexity, increased focus on R&D, improved cash flow, and provide more attractive options for investors. The potential challenges of the breakup include potential loss of synergies, risk of overlap, and unforeseen costs. However, investors should view the breakup as an opportunity to identify value, analyze risk-adjusted returns, and diversify their portfolios.
The success of the breakup remains to be seen, but the potential upside for investors is significant. By carefully analyzing the value potential of each division and diversifying their portfolios, investors should be able to reap the rewards of United Technologies’ breakup.
