Business

August 2, 2013

China deal drives merger, acquisition activity in second quarter

Aerospace and defense merger and acquisition activity in the United States continues to be affected by sequestration and defense budget cuts in the second quarter of 2013.

However, China played a positive role in the deal market where the pace of Chinese-involved deals has increased year-to-date, according to PwC US.

In the two years since sequestration became law, there has been a lot of uncertainty, creating a soft deal market, particularly in U.S. defense merger and acquisition activity,î said Scott Thompson, PwCís U.S. aerospace & defense leader. ìHowever, we are starting to see a slight uptick in interest from U.S. defense companies. It will likely still be slow in terms of holistic defense M&A activity, but once the 2014 U.S. defense budget is set, it will provide more certainty and we may start to see increased momentum in deal making.

Deal volume remained consistent in the first two quarters of 2013, with both periods recording 12 deals worth more than $50 million. Deal value increased to $4.1 billion during the second quarter of 2013, compared to $1.9 billion in the first quarter of 2013. This increase in deal value was the result of one Chinese mega deal (worth more than $1 billion) in the second quarter of 2013 ñ the first mega deal of the year ñ that had a total value of $1.5 billion. However, the annualized rate of deal value is only slightly more than half the 10-year trailing average.

In the first half of 2013, there were 11 U.S. deals worth more than $50 million with a total value of
$2.5 billion, compared to six Asia & Oceania deals totaling $2.6 billion, three of which were Chinese local deals representing $1.8 billion. ìChina is continuing to increase funding for engine R&D and reduce dependence on foreign engine technology by prioritizing domestic development. This engine R&D consolidation is leading to an increase in Chinese deal activity as the nation is trying to move ahead domestically in this sector,î continued Thompson.

Aerospace also continues to lead M&A activity as the defense sector awaits for some more guidance. So far in 2013, there were 17 aerospace deals worth more than $50 million with a total value of $4.2 billion, compared to four defense deals totaling $1.3 billion. The number of aerospace deals announced in 2013 is on pace to rank the highest of any annual total since 2000, although deal value continues to be soft.

While we saw strategic investors dominate the A&D M&A market during the second quarter, weíre starting to see financial investors slowly ramping up their interest in A&D deal making,î said Thompson. They are interested in the aerospace market, but are also showing some interest on the defense side where theyíll look to buy when the opportunity arises. There are still a lot of questions, but weíre seeing some optimism and interest in wanting to do deals ñ itís just a matter of seeing the right assets come up.




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