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
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
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
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