According to an article published by defensenews.com, we can expect to see a "steady" level of M&A activity in the defense sector in the coming years. This prediction comes from David Melcher, head of Aerospace Industries Association – the largest US aviation trade group. According to Melcher, M&A activity has begun to pick up in recent years, due to reduced uncertainty surrounding government budgets in the defense marketplace. Companies are now consolidating at an increased rate as a way to find new growth paths.
In addition to M&A, Melcher predicts that the industry will witness more "spinouts" in the coming years. As support for this prediction, the article notes that defense companies have been spinning off their technical services businesses in recent years.
However, Melcher predicts that most of this activity will take place amongst the mid to small tier companies. Prime contractors are not expected to engage in similar merger activity, partially due to expected government resistance to any M&A amongst the larger companies within the industry.
Another article from nationaldefensemagazine.org suggests that Melcher's predictions are well founded. According to the article, mid-size defense companies are increasingly emerging as attractive targets for private equity firms. Of particular interest are the mid-tier companies that can compete with the large prime contractors as a result of their specialized technologies. While interest in defense contractors has been widespread, private equity firms that have extensive experience with the industry have been the most active in the sector in recent years.
The article notes that Houlihan Lokey's aerospace, defense and government group alone has worked on 23 government services deals since 2015. All together, these deals total over $3 billion worth of activity. Another major player, Arlington Capital Partners, has been involved in more than 20 transactions over the past five years.
Jean Stack, the managing director of Houlihan Lokey's aerospace, defense and government group, states that the recent uptick in activity within the sector is due to the fact that "investors are sifting through the defense sector with fresh eyes and making long-term bets". However, she notes that not all investors are pursuing the same approach to the industry. Some are looking for stable, long term investments that can be supplemented with further acquisitions, whereas others are simply looking for a near-term opportunity.
While the prospects for the defense sector in the near to medium term are exciting, it is likely that there will be even more opportunities arising from the industry in the longer term. According to an article from janes.com, defense and security contracts will face increasingly competitive environments in the future. These competitive pressures are likely to arise from new actors from both emerging markets and adjacent industries. In particular, the article predicts that high tech companies will increasingly enter the defense space. While the entry of new players in the arena will lead to difficulties for some traditional industry actors, it will also create opportunities for those who are flexible enough to adapt to the changes. Ultimately, the article recommends that the defense industry should treat high-tech companies as potential partners and/or M&A targets.
The author wishes to acknowledge the contributions of Samuel Keen, Summer Student, for his contributions in preparing this posting.
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