Raytheon deal upends the aerospace playing field

United Technologies Corp.'s latest megadeal with Raytheon Co. should be a wake-up call to its rivals, including Honeywell, which has aerospace operations in the Twin Cities.

Honeywell and another top competitor, GE, have their reasons for sitting out the mergers-and-acquisitions rush. After former Honeywell CEO Dave Cote made a failed attempt at merging with United Technologies in 2016, successor Darius Adamczyk has preferred to focus on streamlining his company and making small, strategic software bets. And while new GE CEO Larry Culp has talked a lot recently about eventually playing "offense" via M&A, the company's power unit remains mired in a slump, and off-balance sheet liabilities still loom large.

Adamczyk has made the argument that scale doesn't matter nearly as much as the quality of the product and has said he feels comfortable with how his company has differentiated itself. There is some validity to that. But pressure will grow on small and midrange aerospace suppliers to merge to stay relevant. And the sheer breadth of the United Technologies business will make it difficult for even the biggest companies to simply stand pat.

For one, United Technologies now has all the right pieces to become a clear leader in the race to develop connected aircraft. With its Rockwell Collins deal, which closed last year, it has expertise in avionics, essentially the brains of the airplane. Raytheon will give it cybersecurity expertise, helping to solve one of the key concerns airlines have about digitizing parts of their planes.

Honeywell has made its own impressive inroads into the digital realm via its Go­Direct software services, crowdsourced radar and wireless connectivity tools, but it will now have to contend with much fiercer competition.

The deal some investors still dream about is a combination of Honeywell and GE's aviation units. Even combined, the companies would still trail the sales volume of a merged United Technologies-Raytheon, but it would go a long way toward catching them up. Honeywell's Adamczyk has already successfully resisted calls from activist investor Dan Loeb to carve out the aerospace unit into a separate entity, although arguably his software investments could go a lot further if applied to a more focused company. An alternative may be for Honey­well or GE to copy United Technologies' playbook and increase their exposure to the defense industry.