Aerospace and Defense M&A Trends
According to the American Institute of Aeronautics and Astronautics (AIAA), the Aerospace and Defense Industry maintains its competitive edge by continually evolving and focusing on new and expanding technology. Expansion areas include but are not limited to micro/nanotechnology, network-centric warfare, intelligence gathering systems, energy optimized aircraft and equipment systems, and testing of alternative fuel sources for aircrafts. Nanotechnology, for example, in recent years has grown into one of the most well-resourced research fields with funding at over 700% of its 1997 level.
The AIAA reports:
"Active areas of research include nano-devices and -systems, nanoelectronics, nano-manufacturing, nano-materials, and nano-sensors. In addition, there is great interest in the environmental, health and safety aspects of nanotechnology. Current research activities include the ability to combine multiple 'nano' disciplines to create new, synergistic applications of nanotechnology."
Aerospace was specifically identified in the President’s FY04 budget by the U.S. National Nanotechnology Initiative as a field in which nanotechnology has the potential to enable a wealth of innovation, particularly in materials/structures and intelligent bio-nanomaterials.
The pressure for innovation in the Aerospace and Defense Industry increased significantly after 9/11 and during the subsequent wars in Afghanistan and Iraq. Of course, a greater focus on national and global security was reflected in US companies as contractors reorganized in order to meet new defense department requirements.
PricewaterhouseCoopers reports that defense deal-making, which was strong during the years following 9/11, actually stalled in 2008 as new market realities became apparent. In 2007, for example, there were 77 private equity deals in the US resulting in a total value of $16 billion. In 2008, there were 31 private equity deals resulting in a mere 2.4 billion total value...a $13.6 billion difference. In 2007, there were seven $1 billion plus deals in the US; in 2008, there was only one—the General Dynamics Corp Jet Aviation deal.
Civil aviation is also took a hit in 2008 as the demand for air travel and air cargo services declined, and jet fuel costs soared in the summer months. Companies such as Boeing and Airbus responded with “modest production cuts” which trickled all the way down the chain of sub-contractors and industry workers.
PwC predicts an even lower year for 2009. Cash flow and reserves is the priority for larger companies, which may leave smaller companies in a bit of trouble, looking for buyers. “Looking forward, concerns about global capacity, cancelled orders, flatter defense spending and technological challenges associated with the manufacture of the new generation of aircraft will influence deal-making.”
Grant Thornton presents a slightly different forecast for the Aerospace and Defense Industry. In fact, it claims that M&A activity was actually strong in 2008 and maintained its position as one of the best performing industries…standing in “stark contrast to U.S. M&A activity as a whole, which declined by a third in volume terms from the prior year.” Overall, according to Thorton, the industry outlook “remains positive” as A&D industry sales grew 2% during the year, which is a new high.
Commercial and military markets showed modest growth in 2008, and sales in 2009 are predicted to increase by 7% “a result of strong backlog, a cautious approach to capacity increases and 2008 sales being depressed by work stoppages at Boeing. Longer term, Boeing remains confident of continued 5% annual growth in air travel.” And, despite reductions expected in defense spending for Iraq, military sales are predicted to increase 4% in 2009 due to a “significant lag between budget cuts and current purchases.”
With conflicting forecasts and uncertainties, perhaps the best advice we can offer our subscribers for the coming months is, as PwC suggests many companies will do, to take on a tempered yet optimistic “wait and see” attitude until concerns have an opportunity to play themselves out. The market will eventually bounce back and as the AIAA claims, the A&D Industry will remain a forerunner globally because of its commitment to research and innovation. Who knows where nanotechnology will carry us in the next decade!
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