Blockbuster Mega Deal Drives Third Quarter Aerospace & Defense M&A Value, According to PwC

A&D Mega Deal Activity Picks Up

U.S.-Affiliated Transactions Dominate Global A&D Deal Landscape

2011 A&D M&A Volume and Value on Pace for Record Level

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Oct 27, 2011, 07:00 ET

NEW YORK, Oct. 27, 2011 /PRNewswire/ -- Global aerospace and defense (A&D) merger and acquisition (M&A) value experienced a sharp increase in the third quarter of 2011, bolstered by one blockbuster transaction worth $16.1 billion announced during the period. The mega deal, if completed, would be the largest acquisition in the history of the A&D sector, according to Mission Control, a quarterly analysis of M&A activity in the global A&D sector by PwC US.

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Third quarter deal value increased to $19.6 billion, with eight deals worth $50 million or more, pushing 2011 deal value to $34.8 billion, more than double the $15.5 billion in deal value for the first nine months of 2010. Aggregate deal value is now on pace for a new record, needing just $7.3 billion of deals in the fourth quarter to exceed the record level of 2007, which was $42.1 billion. The rise in deal value, driven largely by that one mega transaction, also significantly boosted average deal value to $892 million for the first nine months compared to $357 million in 2010. According to PwC, the pace of mega deal activity picked up slightly in 2011, with four mega deals announced through the first three quarters of 2011 compared to four through all of 2010.

"A&D companies are continuing to improve their cash positions and should be able to put more of their cash to work in larger acquisitions," said Scott Thompson, U.S. aerospace and defense leader at PwC. "Investor pressure on capital deployment is partly driving the acquisition activity. But the dynamics are very different between commercial aerospace and defense. Growth in commercial aerospace is driving interest in that sector and allows sellers a high value, while still allowing buyers strong accretion. Contraction is what's driving portfolio reshaping in the defense industry, and we believe that will be a significant driver of consolidation."

The increasing involvement of U.S. companies in the A&D deal market was notable as U.S.-affiliated transactions with value greater than $50 million made up 75 percent of total deal volume and 94 percent of total deal value in the third quarter, accounting for six deals with a total value of $18.5 billion. During the last five- and ten-year periods, U.S. entities were involved in approximately 65 to 70 percent of deals as measured by volume and value, but since 2010, U.S. participation has moved into the 75 to 80 percent range.

The increase in U.S.-related deal activity was driven by domestic consolidation and inbound foreign interest in the U.S. defense sector, particularly for smaller defense targets in surveillance and security, which demonstrates the attractiveness of the size of the U.S. market.

According to PwC, the major impetus for future cross-border deals is likely to be the need to consolidate and compete more effectively for scarcer defense dollars in Western nations. The potential for domestic deals is also strong, as emerging markets work to build out their own aerospace industries.

With increasing aircraft production rates driven by fleet expansion in Asia and fleet replacement in North America, PwC expects commercial aerospace to be more likely to contribute larger transactions. "Large global aerospace and defense competitors continue to increase their cash stockpiles, and while this doesn't guarantee that strategic investors will bid up valuations for targets, it is a positive harbinger of overall future deal activity and could contribute to more competition for attractive targets," concluded Thompson.

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.

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SOURCE PwC