Business

August 14, 2012

Aerospace and defense deal activity remains sluggish

Global aerospace and defense merger and acquisition activity remained down during the second quarter of 2012 compared to recent prior periods, according to Mission Control, a quarterly analysis of merger and acquisition activity in the global aerospace and defense sector by PwC US.

Smaller deals drove the majority of deal activity in the second quarter as large deals were impacted primarily by uncertainty about U.S. defense budgets and programs due to the unresolved U.S. sequestration issue.

There were 14 deals that were worth more than $50 million in the second quarter of 2012, more than a four-fold increase from the previous quarter’s total of only three deals. However, total deal value was only $3.7 billion in the second quarter. No mega deals (transactions worth more than $1 billion) occurred during the second quarter of 2012. With an aggregate deal value of only $5 billion during the first half of the year, merger and acquisition activity could be the lowest in more than a decade, even less than the height of the financial crisis if the second half of the year is consistent with the first half.

“One barrier to deal activity is the uncertainty about U.S. defense budgets and programs due to the unresolved U.S. sequestration issue, which is making it difficult for buyers and sellers to agree on value when there is uncertainty about the future cash flows of these businesses, resulting in a nearly complete absence of large deals,” said Scott Thompson, U.S. aerospace and defense leader at PwC. “However, once sequestration is resolved, most expect M&A activity to increase. Declining defense budgets may result in a wave of further consolidation, and therefore, many expect that a combination of economic forces and pent-up demand will drive deals after the sequestration matter is resolved.”

U.S. activity is down as defense companies in this market are directly affected by the budget uncertainty. The balance of deal making is shifting to the BRIC (Brazil, Russia, India and China) regions and emerging markets. BRIC entities accounted for almost 30 percent of deals worth more than $50 million in the second quarter of 2012, compared to only 15 percent of deals in all of 2011. Europe led inbound transactions during the first half of 2012 with four deals.

“Asia is gaining momentum in deal activity, which is consistent with growing defense budgets in the region, in addition to the ongoing growth of their domestic aerospace industries,” continued Thompson. “In addition, the relative weakness of the Euro may increase the potential that European targets will be a driver of activity in future periods.”

Aerospace targets, which benefit from a relatively high growth outlook compared to defense, drove more of the transactions so far this year. Motivations for these deals include the desire to benefit from the relatively high growth in commercial aerospace and a need to consolidate the supply chain in order to ensure financial strength that is sufficient to meet the requirements of the ongoing OEM production ramp up.

Cyber security and unmanned vehicles remain priorities for defense contractors, but defense companies are diversifying more into small industrial businesses. Many of these deals have small or undisclosed values and targets generally fall into areas such as government services, information technology and communications.

“The defense sector is entering into these new arenas to improve capabilities in markets with a more stable and higher growth outlook. Large defense companies may remain focused on small-scale merger and acquisition and organic growth through expanding foreign military sales, until there is more clarity surrounding the budget issues,” said PwC’s Thompson. “However, under the most bearish defense spending scenarios, significant horizontal consolidation among defense companies is possible and could lead to some historically large deals.”

Although cash levels remain high in the A&D sector, stock swaps have become more popular as a method for financing deals this year, reflecting the divergence in valuation as deal flow involves more aerospace acquirers than in the defense industry. In addition, the proportion of acquirers that are publicly traded has increased this year, which creates an option to use stock swaps that didn’t exist to the same degree as in the past.

“Overall valuations are down from last year, suggesting the caution of acquirers in the A&D sector, with multiples for defense targets generally lagging behind the sector average. This may not reverse if growth prospects between the A&D parts of the sector remain divergent,” said Thompson. “But, we are also seeing a rise in unsolicited bids, potentially driven by the increase in cash positions and relatively low valuations across the sector.”

For a copy of Mission Control, PwC’s quarterly analysis of M&A activity in the global aerospace and defense sector, please visit: www.pwc.com/us/industrialproducts

 

 




All of this week's top headlines to your email every Friday.


 
 

 
Courtesy graphic

Lockheed Martin conducts flight tests of aircraft laser turret for DARPA

AFRL photograph The Aero-adaptive Aero-optic Beam Control turret that Lockheed Martin is developing for the Defense Advanced Research Projects Agency and the Air Force Research Laboratory has completed initial flight testing. T...
 
 

Lockheed Martin advances live, virtual, constructive training in flight test

https://www.youtube.com/watch?feature=player_embedded&v=jvXmOW8L3mU Lockheed Martin successfully tested a new solution for integrated live, virtual and constructive training during a flight demonstration at the company’s Aeronautics facility in Fort Worth, Texas. During the flight test, a pilot flying in a live F-16 engaged in a synthetic training exercise with a pilot flying as wing...
 
 

Raytheon begins full rate production on TALON Laser Guided Rockets

Under a $117 million contract awarded to Raytheon, Raytheon Missile Systems has begun production of the TALON Laser Guided Rocket. In 2013, the Armed Forces General Headquarters of the United Arab Emirates awarded Tawazun a contract to procure the TALON Laser Guided Rocket. “Full rate production of the TALON LGR is a significant milestone for...
 

 

Advanced Photonix awarded contract for U.S. Navy missile weapons program

Advanced Photonix, Inc.® announced Sept. 15 that it has received a contract worth approximately $1,600,000 from a leading military contractor, which acts as a prime supplier for the U.S. Navy’s Guided Missile Weapon System. The contract is for a custom photodiode and is expected to be completed within the next 18 months, and payment is...
 
 

U.S. Air Force expands RQ-4 Global Hawk fleet

The U.S. Air Force has awarded Northrop Grumman a $354 million primarily firm-fixed-price contract to expand their RQ-4 Global Hawk unmanned aircraft system fleet by three aircraft. Global Hawk operates multiple sensors simultaneously to gather intelligence, surveillance and reconnaissance data. The new aircraft are Multi-INT models that carry sophisticated imaging and electronic signals sensor...
 
 

U.S. Navy awards General Dynamics $234 million for nuclear-sub support work

The U.S. Navy has awarded a $234 million contract to General Dynamics Electric Boat to provide planning yard work, engineering and technical support for nuclear submarines. The contract has a total potential value of $1.5 billion over five years if all options are exercised. Electric Boat is a wholly owned subsidiary of General Dynamics. Under...
 




0 Comments


Be the first to comment!


Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>