Aerospace & Defense M&A Activity Breaks Record in 2011, According to PwC

U.S.-Affiliated Transactions Dominated Activity and Cross-Border Deals Increased

Average Deal Size Grew as Mega Deal Volume Showed Signs of a Recovery

Continued High Level of M&A Activity Anticipated in 2012

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Feb 07, 2012, 08:00 ET

NEW YORK, Feb. 7, 2012 /PRNewswire/ -- Global aerospace and defense (A&D) merger and acquisition (M&A) value reached a record level in 2011, according to Mission Control, a quarterly analysis of M&A activity in the global A&D sector by PwC US. Aggregate deal value reached $43.7 billion supported by 341 deals in 2011, compared to total deal value of $21.9 billion and 332 deals in 2010. The 2011 record surpassed the previous A&D deal record of $42 billion in 2007.

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The primary driver of deal value in 2011 was a $16 billion transaction, the largest in sector history. However, volume drivers were broad-based, with higher numbers for small deals (less than $50 million) and mega deals (above $1 billion) alike. A total of six mega deals were completed in 2011, recovering from the recent low of only two such announcements in 2009. This led to an increase in average transaction size, even when removing the impact of the $16 billion deal. There was also a big increase in deals for aerospace targets in 2011, measured on both a volume and value basis, while the number of defense deals decreased. Aerospace deal multiples also surpassed defense targets.

"We saw a wide-ranging mix of deals in 2011 as global aerospace and defense M&A activity reached record levels. Larger deals became more common, driven by sales of slower-growth defense businesses and private equity exits, while smaller deals drove the bulk of deal volume as major players with ample liquidity focused on acquiring growth," said Scott Thompson, U.S. aerospace and defense leader at PwC. "We anticipate a continued high level of M&A activity in the year ahead, driven partly by strong cash positions and a favorable debt market, particularly in aerospace where the outlook is being boosted by fleet expansion in Asia and strong replacement demand in Western countries. Conversely, global deal activity in the defense sector is increasingly being impacted by the wave of government cutbacks in key markets stemming from fiscal retrenchment. The uncertain outlook is causing defense contractors to further globalize in the face of growing competition for a shrinking pool of business. These trends will play a major role in deal activity as the year unfolds."

As expected, U.S. entities were involved in the vast majority of A&D deals in 2011, whether measured by value or number of deals. The high number of larger U.S. deals drove an increase in the U.S. share of total deal value in 2011, exceeding historical norms. This reflects the larger number of big companies based in the U.S. All but one of the six mega deals involved both a U.S. acquirer and a U.S. target.

Cross-border A&D deals increased in 2011 and European acquirers played a greater role in the A&D deal market compared to 2010. The pace of market consolidation hastened within Europe and outbound deals also increased. All of the European outbound deals above the $50 million threshold in 2011 were for North American targets, thus boosting the number of cross-border deals for U.S. targets.

Looking ahead, the A&D sector continues to globalize as non-U.S. players increase their competitiveness, benefiting from a growth in air travel and defense budgets in select regions such as Asia, Latin America and the Middle East, even as other countries cut spending. According to the analysis, many nations, such as China, India and Brazil, are seeking to take advantage of this demand shift by fostering their own domestic industries. Of these markets, China appears to be best-positioned to advance its national aerospace industry given the relative level of domestic demand as well as technological help from western suppliers.

Special Report: Can Aircraft Manufacturers Prevent Rate Ramp-Up Problems?

According to PwC's analysis, high production rate ramp-up may be needed across much of the aerospace and defense sector in 2012 and beyond. Managing risk in the supply chain will likely become more important in commercial aerospace where the industry operating model has pushed much of the design and manufacturing work to suppliers, often in the form of risk sharing partnerships.

PwC analyzed the potential capacity risks in the aerospace supply chain and the analysis showed that one-fifth (21 percent) of suppliers are fully prepared to support the high ramp-up required in the next five years. Companies in the aerospace sector are generally alert to the need to proactively identify, prevent and manage supply chain risk. However, in many cases, current approaches to supply chain risk management are either too complex or too simple, leaving companies vulnerable to issues, according to the findings.

"Companies need a practical yet comprehensive method to identify rate readiness risks in the aerospace and defense supply chain," said Thompson. "In the majority of cases, supplier transformation to address risks can take place without the need for any M&A. But, in some cases, consolidation either within the supply chain or vertical integration of the supplier with the aircraft manufacturer should not be ruled out."

For a copy of Mission Control, PwC's quarterly analysis of M&A activity in the global aerospace and defense sector, please visit: www.pwc.com/us/industrialproducts

About PwC's Global Aerospace & Defense Practice

PwC's Aerospace & Defense practice is a global network of professionals who provide industry-focused assurance, tax and advisory services to leading Aerospace & Defense companies around the world. This Aerospace & Defense expertise and experience is enhanced by that of our Public Services practice with professionals focused on assisting federal, state, and local governments, international agencies, and healthcare entities.

About PwC's Industrial Products practice

PwC's Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. For more information please visit: www.pwc.com/us/en/industrial-products

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