What You Need To Know About United Technologies' Business Split

Multinational conglomerate United Technologies Corporation UTX said Monday it will split itself into three businesses in conjunction with the completed acquisition of Rockwell Collins. Those businesses are:

• United Technologies, which will supply components to the aerospace and defense sector.
• Otis, which will manufacturer elevators, escalators and moving walkways.
• Carrier, which will provide HVAC, refrigeration, building automation, fire safety and other security products.

Shares of United Technologies were trading lower by 5.7 percent to $120.61 at time of publication Tuesday afternoon.

Related Link: United Technologies Is Breaking Itself Up Into 3 Companies

CEO: The Right Thing To Do

United Technologies' management team studied 74 different spin transactions which occurred over the past 10 years with a focus on "what are the cash flows of the business over time and can the businesses support themselves with the cash flows in order to make enough investments to sustain growth," United Technologies CEO Greg Hayes told CNBC Tuesday.

Meanwhile, United Technologies was looking at its own strategic options while operating under the theory that the cash flow from Otis and Carrier need to be funneled to the aerospace business to finance multi billion dollar investments in new engines.

After taking a deep dive, Hayes says this isn't the case as the cash flow from each business segment more than covers all of the investments in R&D, capex, and dividends.

"That was the magic moment the board said 'we don't really need to be together," he said.

Bank Of America: Earlier Than Expected

The separation was widely expected after the company announced a portfolio review in early 2018, Bank of America's Ronald Epstein said in a research report. The timing of the announcement is a bit of a surprise, although logic dictates there's minimal synergies to operate one business with units spanning across aerospace, defense, elevators, HVAC, among others.

As such, Epstein said the split announcement should be considered a positive move as the legacy United Technologies' stock is trading at a discount to its peers on a sum-of-the-parts basis. By breaking up the company into three, it should unlock value by modeling each unit as its own separate and independent unit.

Epstein maintains a Buy rating on United Technologies with an unchanged $180 price target.

Jefferies: More Focused Enterprise Over The Long Term

United Technologies' split in a tax-free transaction within an 18- to 24-month timeline is likely to put pressure on the stock in the near term due to potential distractions and disruptions, Jefferies' Sheila Kahyaoglu said in a research report. Over the long term, however, the break-up into three businesses will likely create a "more focused enterprise," especially in the aerospace unit that is essentially four different companies rolled into one single segment.

Kahyaoglu maintains at Buy rating on the stock with an unchanged $148 price target.