LONDON (28th April 2009) – The flow of European companies making acquisitions in the American defence sector became a flood in 2008, accounting for 73% of deal activity by value.
Jane’s Industry Quarterly Editor Guy Anderson explained, “2008 also saw the largest defence deal of the decade as Italy’s Finmeccanica finally pushed into America with the $5.2 acquisition of DRS Technologies. There are strong indications that a number of European operators will continue to look across the Atlantic in 2009.”
Anderson continued, “Acquisitions funds did not flow evenly in both directions across the Atlantic. The gulf between the flow of funds East and the flow West widened enormously between 2007 and 2008.”
For every $1 invested by Europeans in the purchase of U.S. defence assets in 2008, American firms spent just over two cents in the EU (a total of $236 million). This compares with U.S. investment of $6 billion in the previous year: a figure which includes General Electric’s $4.8 billion purchase of Smith’s Aerospace.
Fitch Ratings noted that the 12 leading United States defence companies, Boeing, General Dynamics, Goodrich, Honeywell, ITT Corporation, L-3 Communications, Lockheed Martin, Northrop Grumman, Raytheon, Rockwell Collins, Textron, and United Technologies Corporation, began 2009 with $16.6 billion of combined available primary credit facilities.
These companies benefit from having committed, long-term credit lines in place. General Dynamics, L-3 and Raytheon have credit facilities that expire before mid-2010. The view that defence companies are cash rich is also validated with this 12 entering 2009 with cash and equivalents of $26.6 billion.
“Deal activity for the remainder of the decade is likely to be led by the largest sector participants. The principal targets in their sights are likely to reflect the new spending priorities in an era of constrained defence spending such as information technology firms, in domains such as cybersecurity and intelligence services, behind-front-line service providers; and electronics specialists with agile, non-platform specific systems,” concluded Anderson.
Jane’s Industry Quarterly Summary
Jane’s Industry Quarterly explains why one particular class of buyers rose to prominence. It examines the market sectors that remain strong and the drivers that will shape the acquisitions landscape for the remainder of the decade whilst identifying the sectors likely to thrive in the coming era of austerity.
The benign financial environment and frenetic competition for targets that drove the value of global mergers and acquisitions activity within the defence sector to $29.7 billion in 2007 had started to stall by the third quarter of the year. Activity levels remained heavily subdued throughout 2008
The total disclosed value of acquisitions plummeted 35.3% year-on-year to $19.2 billion in 2008, while the volume of activity fell in tandem from 184 deals in 2007 to just 118 in the same period.
A dearth of credit and a rediscovered need to preserve cash combined to shake out many of the lower tier defence organisations that had driven the lion’s share of deals in 2007, while private finance-backed acquisitions – which accounted for almost one in ten deals the previous year – were relatively scarce.
Despite the harsher climate for deals, it would be wildly inaccurate to argue that the global economic downturn had laid waste to acquisitions activity. There were a number of constants, some of which bode well for deal activity for the remainder of this decade.
Deal values held have held firm in the defence industry: prices paid for acquisition targets scarcely changed from the peaks of 2007 thanks to a combination of a shortage of distressed sellers and continued competition for prime targets.
The headline falls in deal activity mask the resilience of the prime contractors: their acquisitions strategies continued virtually unabated in 2008 with activity levels scarcely changed from the previous year. Jane’s Industry Quarterly believes their overall strong balance sheets, enviable liquidity positions, and the continued confidence of investors leave them well placed to meet acquisitions aspirations over the coming years. Strategic investors at the upper end of the second tier have provided similar reasons for optimism, having achieved non-organic growth during the current year and having emerged with a degree of headroom (and an appetite) for further activity.
The outlook for smaller organisations (typically with revenues below $250 million per annum) is less certain: barring a rapid (and unlikely) return of the credit availability and optimistic climate of 2006 and 2007, they are unlikely to return as buyers to a significant degree. There are reasons to believe, furthermore, that some of those further down the supply chain could shift from hunters to prey.
Jane’s Industry Quarterly believes liquidity issues could lead prime contractors to intervene in order to prevent critical gaps forming in supply chains: a shift in acquisition strategy from growth to preservation. Likewise, the possibility of smaller struggling companies seeking buyers to ensure survival should not be discounted.
Jane’s Industry Quarterly is published by IHS Jane’s, an IHS (NYSE: IHS) company.