Aerospace and Defense Sector M&A Deal Value Shows Growth, Climbing to $3.8 Billion in Q3 2010, According to PwC

Domestic A&D Deal Activity Sores as North American Region Accounts for 70% of Deals in Q3

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Nov 18, 2010, 09:25 ET

NEW YORK, Nov. 18, 2010 /PRNewswire/ -- The merger and acquisition (M&A) deal activity in the aerospace and defense (A&D) sector continued to improve in the third quarter of 2010, with total deal value and volume exceeding the pace of 2009 and the year-to-date period, according to the PwC US report, Mission control: Third-quarter 2010 aerospace and defense industry mergers and acquisitions analysis. This positive momentum has been fueled by the reemergence of U.S. acquirers and targets, particularly in large deal activity. New spending priorities established by the U.S. Quadrennial Defense Review and the U.S. Navy's FY11 Shipbuilding Plan has resulted in greater certainty around demand in the A&D sector and U.S. companies are quickly becoming more engaged in the deal market.

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In Q3 2010, the pace of deal activity in the A&D sector continued its recovery, as both deal value and volume exceeded the level of activity from 2009 and the year-to-date periods. During the third quarter of this year, there were 10 announced deals worth $50 million or more, with a total deal value of $3.8 billion. This represents a modest uptick over the eight announced deals with a total deal value of $3.2 billion reported in Q3 2009. One of the primary drivers for this increase in deal activity is the growing involvement from U.S. entities, which were engaged in almost all transactions announced in Q3 2010.

"We're increasingly optimistic about the outlook for A&D deal activity. In the near-term, defense M&A will drive activity as companies re-think their core businesses and spending priorities continue to evolve," said Scott Thompson, PwC's U.S. aerospace and defense leader. "Over the long haul, major defense consolidations could emerge, as well as increased M&A activity in the commercial aerospace sector reflecting the relatively high demand growth that typically entices acquirers."

Average deal values in the third quarter remained consistent with the year-to-date period, although there was a large disparity between the average size of deals involving U.S. entities and those that did not. In Q3 2010, average deal value was $380 million. However, average deal value for deals with U.S. targets and/or acquirers was $442 million. When excluding deals with U.S. targets and/or acquirers, average deal value showed a significant decrease, dropping to $132 million.

From a regional perspective, involvement from U.S. entities in deal activity is on the rise and the importance of North American targets is growing compared to the overall deal market. In Q3 2010, the North American region accounted for 70 percent of announced deals. This tilt toward North America comes at the expense of UK and Eurozone targets and contributed to the absence of acquirers from emerging and developing economies during the quarter.

In addition, seven on the 10 announced deals in Q3 2010 were local market deals, while the remaining three were cross-border deals. Though overall cross-border activity has not changed much since 2009, these deals are likely to increase as expected global spending and demand patterns realign.

"The U.S. targets should remain attractive for foreign buyers despite differences in relative defense-spending growth rates because the U.S. is simply the largest defense market in the world," added Thompson. "However, the spread of protectionist sentiments in the face of ongoing economic weakness remains a risk. Protectionist concerns could actually slow the growth of cross-border deals even as the broader M&A market continues to recover."

Curate's egg: The changing deal environment

The third quarter Mission control report takes a closer look at a global economy characterized by instability and its impact on the M&A deal environment. Today's global economy is like a curate's egg. Economic expectations are good and bad, positive and negative.

The concept of a mixed bag is especially relevant to the A&D industry's M&A market. On the positive side, the volume of deals announced during the third quarter of 2010 increased from the previous year, an indication of stability and optimism in the global economy. On the downside, worries continue about a protracted economic recovery and pressure on defense spending.

Due to increased uncertainty, companies are structuring deals in new ways and handling them differently. Specifically, many are avoiding large, staged auctions, except in cases that involve a sizable, high-profile asset. Instead, companies are trending towards one-to-one negotiations in off-market deals, where the buyer proactively identifies and approaches the target. Additionally, A&D companies have become more cautious and diligent about what they are buying. Companies in this sector are looking for deals that can provide new strategic opportunities, expand their footprints, or offer access to the technologies and know-how necessary to compete in growth areas.

More than ever, deals today must provide a strategic and commercial fit with existing operations that drives growth.

For information on Mission control and to access the full report, including the special section on the changing deal environment in the A&D sector, visit: http://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.

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