Bill Ackman’s critique of United Technologies Corp.’s planned merger with Raytheon Co. cries out for a critique of its own.

The activist investor sent an e-mail to United Technologies CEO Greg Hayes over the weekend expressing concern about reports that the company was nearing a deal with missile-maker Raytheon. “We cannot comprehend the strategic logic,” Ackman wrote of the merger, which was announced late Sunday as an all-stock, no premium transaction. 

By Bloomberg Intelligence’s estimation, the combination will create a US$120 billion aerospace and defense powerhouse. Ackman isn’t impressed, and in his letter blasted the deal as well as United Technologies’ decision to used “today’s massively undervalued” stock as currency. He added that Raytheon is “of inferior quality” to United Technologies’ existing aerospace businesses. He owns less than 1 per cent of United Technologies, according to data compiled by Bloomberg.

Ackman’s not wrong that United Technologies stock looks a bit cheap right now. The company’s disparate parts should be valued at US$159 a share, RBC analyst Deane Dray wrote in an April report. That compares to a closing price of US$132.15 on Friday, before news of the talks with Raytheon. The discount is partly a reflection of the fact that some of those disparate parts are in the processing of being peeled off from the company: United Technologies unveiled a breakup plan in November under which it will spin off its Carrier building-controls and Otis elevator units into separate companies. What remains will be United Technologies’ aerospace businesses, including the avionics giant Rockwell Collins Inc. that the company bought for US$30 billion last year. Problem is, the breakup won’t happen until next year, and the long waiting period creates what analysts call a “spin purgatory.” There’s no real incentive for investors to buy a stock whose primary catalysts are as much as a year away.

Still, it’s not as if United Technologies is paying top dollar for Raytheon: Wolfe Research analyst Nigel Coe estimates the deal implies an Ebitda multiple of 11.3 times for Raytheon, in line with where it was trading before the deal and matching its five-year average, according to data compiled by Bloomberg. And I can make an argument that the combined company should enjoy a higher valuation than either would alone.

The merged entity will have strategic focus and sales heft to rival Boeing Co., but greater diversification across commercial aircraft products and defense contracts, providing more of a buffer should either market falter. Absorbing Raytheon’s relatively untapped balance sheet and healthy cash flow helps the United Technologies aerospace assets reduce their debt load more quickly, positioning the combined company to invest aggressively in new technologies. I have been skeptical in the past of the advantages of scale in the aviation market and doubtful of promises made by other big companies to redouble their R&D efforts after a merger. But aerospace and defense is a naturally capital-intensive business where the arms race for better technology thankfully remains very much alive. Raytheon in particular seems to be realizing that it will need to step up spending to gain a competitive edge in priority areas like hypersonics and cybersecurity.  

Ackman’s view of Raytheon as the inferior, more volatile partner in this deal may come as a surprise to those who know the companies best. About 40 per cent of Raytheon’s backlog is comprised of foreign buyers, making it one of the more insulated defense contractors from changing political attitudes in Washington. On the commercial side of the market, Boeing CEO Dennis Muilenburg recently renewed his commitment to building a US$50 billion after-market parts and services business, even as the company remains mired in controversy over its grounded 737 Max jet. Boeing’s efforts to chip away at its suppliers’ market share come as analysts are starting to worry the robust commercial aerospace spending cycle may be running out of steam, making it a wise time for United Technologies to be diversifying. “The fact that UTC is an interested buyer of a less-cyclical, defense-focused asset like Raytheon is not really a surprise,” Stifel Financial Corp. analyst Joseph DeNardi wrote in a report. “It’s less clear to us what’s in the deal for Raytheon.” He also pointed out Raytheon’s higher free-cash-flow yield.

Raytheon may have felt compelled to act after most of its major rivals linked tie-ups over the past few years; perhaps the company worried about another defense giant linking up with United Technologies down the road. But “inferior?” I’m not sure that I buy that.