Israeli defense cos will be hit by Raytheon-UTC merger

Iron Dome photo: Shaul Golan

Defense sources: Entering the US market will require greater efforts and have less chances of success.

Senior Israeli defense industry sources say that the merger between Raytheon and United Technologies in the US will create a huge aerospace and defense corporation. They are expressing concern that the merger will create uncertainty and further escalate competition in global markets.

Defense industry experts are having a hard time assessing the merger's effect on Israeli companies, but statements by leading sources make it clear that the already intense competition in defense markets will further increase. "This is not necessarily a good event for Israeli companies. Their chances of entering the US market will diminish, and to do so will require great efforts," a senior defense source told "Globes."

The Raytheon-United Technologies merger is part of a trend towards consolidation in the US defense market, and also in Europe. The merged company, to be named Raytheon Technologies, will be one of the three largest companies in its field, together with Lockheed Martin and Boeing. Dealing with it will require Israeli companies seeking deals in the US and worldwide to bring added value and much more creativity to the markets.

The three largest Israeli defense companies - Rafael Advanced Defense Systems, Israel Aerospace Industries (IAI), and Elbit Systems - are casting eyes at the US market and trying to consolidate their position in it for the coming years. The merger will therefore require them to engage in a thorough analysis of the new situation and the balance of power in the market.

As of now, many questions about this merger are still open. One concerns the status of Israeli companies that are suppliers for Raytheon. For example, Elbit Systems sells dichromatic lasers to Raytheon that broadcast on two wavelengths, and are used to manufacture its special payloads installed on unmanned aerial vehicles. It is unclear how, if at all, the merger will affect the profound cooperation of many years' standing between Rafael and Raytheon on air defense systems, such as David's Sling and Iron Dome.

Cooperation between Rafael and Raytheon in this sphere is based on agreements between the US administration and Israel that include US financing for the development programs of the two systems. Under these understandings, a large proportion of these systems are manufactured in Raytheon's plants in the US.

Defense sources in Israel say that when two companies such as Raytheon and United Technologies join forces, they will also unite their products portfolio. As a result, many of the agreements previously made with foreign companies, such as Israeli companies, are liable to become superfluous. It is therefore likely that without substantial added value and a significant technological advantage, the chances for an Israel company to penetrate and become established in the US market, which were already not very high before the merger, will further decrease.

For the past two years, IAI has been trying to reinvent itself with respect to the US market, and is still in the middle of a process designed to improve its standing there.

Elbit Systems, IAI's regular competitor, has done a good job of adjusting itself to this market in recent years through a strategy of acquisitions. It recently acquired the night vision products division of Harris Corporation, and previously acquired Universal Avionics Systems. Elbit Systems' sales in the US market totaled $1 billion in the first quarter of the year, 27% of the company's revenue.

Six months ago, Elbit Systems completed its acquisition of IMI from the state, thereby substantially upgrading its basket of products. One of the big hits on which Elbit Systems is counting in this deal is an active defense system of the Iron Fist type against anti-tank missiles.

Defense market sources describe Elbit Systems' policy in recent years as advance preparation for dramatic changes in the US market, including mergers between major companies. These measures are designed to enable Elbit Systems to cope with these changes.

Published by Globes, Israel business news - en.globes.co.il - on June 12, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Iron Dome photo: Shaul Golan
Iron Dome photo: Shaul Golan
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