U.S.

March 27, 2012

Aerospace, defense industry poised for a mergers, acquisitions boom

Following years of uncertainty, the aerospace and defense industry is on the brink of a mergers and acquisitions boom, according to a new Deloitte report.

Specifically, the study shows many companies are well-positioned to take strategic advantage of consolidation opportunities, particularly at the supplier level, due to pent-up demand, available capital and favorable valuations.

And, with the industry facing another year of expected flat performance, many executives are making it a high priority to strategically approach M&A in order to avoid decline.

However, as recent research on mergers and acquisitions activity across multiple industries shows, with as many as 70 percent of transactions failing to create long-term value, A&D leaders cannot afford to be wrong in their M&A pursuits.

Deloitte’s report, “Three Keys to M&A Effectiveness for A&D Executives: Capturing the Full Value of Strategic Acquisitions,” underscores the importance of careful planning prior to execution, and how it can prevent failure and ensure activity results in substantial growth for a company.

“Over the past 10 years we’ve seen the A&D industry stockpile cash as a result of success in continued operations, exhaustion of other cash deployment activities and economic uncertainty,” said Marty Hartigan, principle, Deloitte Consulting LLP and report co-author. “Merger and acquisition activity looks more appealing now as a cash deployment strategy after years of stock repurchases, dividend increases and discretionary contributions to pension obligations.”

Drawing on industry trends, the Deloitte report suggests A&D executives consider the following three key guidelines to ensure M&A effectiveness and maintain performance throughout the transaction:

  • Manage the demand of integration by limiting the total number of acquisitions
  • Make M&A central to a company’s growth strategy by implementing meaningful acquisitions
  • Target companies with business models that enhance the acquiring company’s market position

According to the Deloitte report, following these guidelines will enable companies to take full strategic advantage of new M&A opportunities and ensure they are prepared for the opportunities of the future that focus on operational and specific-supplier segments.

This is in stark contrast with the defense contractor mega-mergers of the past. Modern segment opportunities include “new reality” technologies such as cyber, unmanned, Intelligence Surveillance and Reconnaissance, precision attack, mission assurance, and logistical and energy-related services. Capitalizing on these opportunities may result in greater industry effectiveness and better competitive positioning of the company, the study notes.

“Recent U.S. Department of Defense budget cuts have brought renewed focus to competitive positioning,” said Tom Captain, vice chairman, Deloitte LLP and U.S. aerospace and defense leader. “Defense contractors need a strategy for growth to fill the pending revenue gap. Carefully planned and executed acquisitions can provide a transformational opportunity to gain new customers and to get into new products and services in this post-Iraq war era.”

The Deloitte report also provides insight on how to tackle integration challenges specific to the A&D industry, including concerns that overhead harmonization hurts competitiveness, integration can reduce overall company specialization, and the belief that the target’s intrinsic value is sensitive to integration activities.

To view “Three Keys to M&A Effectiveness for A&D Executives: Capturing the Full Value of Strategic Acquisitions,” visit www.deloitte.com/us/ma/3keys.




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