Aerospace and defence industry M&A flying high

August 2016  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

Living as we do in a world rife with geopolitical uncertainty and an increased risk of terrorism, it would seem a no-brainer to assume that the global aerospace and defence (A&D) industry is an environment in which spending is likely to be very much on the high side.

In fact, it would be more accurate to describe A&D spending as being on the astronomical side, with mergers & acquisitions (M&A) activity especially prevalent. ‘Mission Control’, PwC’s quarterly analysis of M&A activity in the A&D industry, confirms that 2015 was a particularly strong year, notching up record levels of deal volume and value.

Drilling down further, the Mission Control data reveals that last year there were 43 deals worth more than $50m, with a total value of $62bn. This compares to 54 deals with a total value of $24bn in 2014 – a 20 percent decrease in deal volume but a 158 percent increase in deal value. Moreover, the total deal value seen in 2015 was 50 percent higher than the previous record year of $41bn set in 2007.

While the PwC analysis notes that the volume of megadeals (transactions worth more than $1bn) were flat on a year-over-year basis, it also confirms that the average megadeal value increased from $2.3bn in 2014 to $8.5bn in 2015 – an escalation driven by one blockbuster deal in Q3 2015: Berkshire Hathaway Inc’s $32.3bn acquisition of Precision Castparts Corp, the largest deal ever seen in the A&D industry.

“2015 was an exciting time for M&A in the aerospace & defence sector where we dealt with very high-value transactions,” said Scott Thompson, PwC’s US Aerospace & Defence Assurance leader, when the Q4 2015 figures were published earlier this year. “As commercial aerospace production continues to increase and defence contractors focus on further portfolio alignment, we expect M&A activity to continue at a healthy pace in 2016.”

But in 2016, things have turned out a bit differently, at least so far. In its analysis of M&A activity in Q1 2016, PwC’s Mission Control report confirms that, on a sequential basis, deal volume declined to eight deals in the first quarter of 2016 compared to 10 in the previous quarter. However, the first quarter of 2016 did see a doubling in deal value to $7.3bn (compared to Q1 2015), driven largely by a megadeal valued at more than $5bn.

Megadeal focus

In terms of mega deals, in January 2016, Leidos Holdings announced its intention to merge with a proportion of Lockheed Martin’s Information Systems and Global Solutions business – a $5.9bn transaction that, according to Chuck Marx, PwC’s US Aerospace & Defense leader, “will result in the defence industry’s largest government services provider with an expected $10bn in annual revenue”.

“It should be noted that not included in this quarter’s analysis is Honeywell International’s withdrawn bid to acquire United Technologies Corporation (UTC), in a stock swap transaction valued at $89.2bn,” informs Mr Marx. “Although the bid was dropped, we see it as a precursor of things to come and look to see successful transactions of this type in the future.”

Aerospace and defence M&A hotspots

The Mission Control analysis verifies that North America continues to be the largest acquirer region, accounting for five of the eight deals announced in Q1 2016. As regards the other three, two deals originated in Europe and one in China.

“Given the technology and capital required to develop new products and processes in the A&D sector, it is not surprising that six of the Q1 2016 deals originated in advanced markets,” opines Mr Marx. “The market in advanced economies is larger, better developed and companies there have access to capital at better rates given the maturity of the industry.”

Expanding product lines

Driven strongly, as they are, by their balance sheets, defence companies are increasingly looking to expand their product lines and increase their scope. “While consolidation by major weapons manufacturers is unlikely given that the US Department of Defense wants to ensure that bidding on contracts remains competitive, niche technologies remain attractive,” suggests Marx.

Knowing full well, of course, that software developers, surveillance equipment manufacturers and cyber security providers are prime targets for acquisition, Mr Marx cites the February 2016 announcement by General Atomics International Services Corporation (GA) that it intends to acquire Miltec Corporation, a manufacturer of missiles and aerospace systems, as a prime example of the expansion taking place across the A&D industry.

Upward trajectory

With deal value having increased in Q1 2016, all the signs point to M&A activity in the A&D industry continuing on an upward trajectory. Given the increasing terrorist and geopolitical uncertainty affecting the US and much of Western Europe, spending across the industry is likely to remain consistent throughout the remainder of 2016, with investors waiting in the wings to deploy capital in the pursuit of further A&D M&A opportunities.

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Fraser Tennant