United Technologies, Raytheon to merge in huge aerospace, defense deal

United Technologies and Raytheon, two of the world's largest aerospace and defense companies, have agreed to join forces.

The combined company, Raytheon Technologies, could command a market capitalization of $120 billion and generate $74 billion in annual revenues.

Shares of both companies are rallying in premarket trading — United Technologies is up 5.2% and Raytheon is up 2.8%.

Watch United Technologies and Raytheon trade live.

Two of the world's largest aerospace and defense companies are joining forces to create the industry's second-biggest player behind Boeing.

United Technologies, which makes electronics and engines for the commercial-aviation sector, and Raytheon, which manufactures missile systems and military equipment for the US government, agreed to combine their businesses on Sunday, the companies announced.

Shares of both companies are rallying in premarket trading — United Technologies is up 5.2% and Raytheon is up 2.8%.

If approved by regulators, the pair plan to merge into Raytheon Technologies, creating a company with a $120 billion market capitalization and $74 billion in annual revenues. It would be a one-stop shop for Patriot and Tomahawk missiles, Pratt & Whitney F-35 fighter-jet engines, cockpit electronics, radars, and other products.

United expects to separate its air-conditioning and elevator businesses, Carrier and Otis, before the merger goes through in the first half of 2020. Raytheon shareholders will receive 2.3348 shares in the combined group for each Raytheon share they hold, giving them a 43% stake in the business. United CEO Greg Hayes will take charge of the group while Raytheon boss Tom Kennedy will serve as executive chairman.

United and Raytheon expect the tie-up to generate more than $1 billion in cost savings within four years of completion, and plan to return between $18 billion and $20 billion to shareholders in the first three years. They also plan to combine research budgets and teams to explore futuristic technologies such as hypersonics, directed energy weapons, and artificial intelligence in commercial aircraft.

The new company faces a mixed outlook under the Trump administration. Higher US defense spending and rising international tensions have fueled demand for fighter jets and munitions, according to Reuters. However, the US-China trade war threatens to weigh on global economic growth and international trade flows, including by air.