Global Aerospace & Defense Sector M&A Deal Value Nearly Doubles in 2010 Compared to Full-Year 2009, According to PwC

Deal volume at a three year high, with 17 deals in Q4 totaling over $4 billion in value

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Feb 22, 2011, 06:00 ET

NEW YORK, Feb. 22, 2011 /PRNewswire/ -- Merger and acquisition (M&A) deal activity in the aerospace and defense (A&D) sector in 2010 bounced back from the 2009 low in deal value, according to the PwC Global report, Mission control 2010 annual and fourth-quarter review: Merger and acquisition activity in the global aerospace and defense industry. Total deal value in the sector rose from $10.9 billion in 2009 to $20.2 billion in 2010, nearly doubling year-over-year. Deal volume remained steady, rising 4 percent from 2009 to 308 announced deals in 2010, the highest annual total in more than 10 years.

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In Q4 2010, there were 17 announced deals over $50 million, representing the highest quarterly total during the past three years. Additionally, four mega-deals, over $1 billion, were announced in 2010, compared with two in 2009. However, recovery in deal value has been more uneven. The total value of deals over $50 million announced during Q4, $4.2 billion, was the lowest quarterly total of the year yet still easily surpassed quarterly total deal values from 2009.

"We have seen a return of larger deals, a continuation of high deal volume and a significant increase in average deal value in 2010, which meets our previous expectations," said Scott Thompson, U.S. aerospace and defense leader. "We believe this strong recovery is a result of competitors responding to a challenging environment for defense and a rapidly improving environment in commercial aerospace. Additionally, this recovery has been driven by significant cash positions and capital markets that are more conducive to financing new deals."

Financial investor involvement in the A&D sector, as measured by deal volume, declined in the fourth quarter, accounting for 12 percent of deal volume, but increased for the year overall with 17 percent of deals in 2010. In total, there were five completed private equity acquisitions with disclosed values over $50 million during the year, and private equity deals accounted for half of the total value of the top ten A&D deals of 2010. Conditions that support financial investment are improving, including reductions in risk premiums, and, because of this, financial investor participation is expected to at least approach longer-term historical levels in 2011.

Cross-border deals as a part of total A&D M&A activity maintained a similar level in 2010 compared with 2009, accounting for 27.8 percent and 28.1 percent of deal volume, respectively. Companies in North America accounted for nearly two-thirds of both the acquirers (67 percent) and targets (65 percent) in 2010 in terms of deal volume (deals worth $50 million or more) compared to 53 percent of acquirers and 53 percent of targets in 2009. Asian companies represented a quarter of targets and acquirers in 2009 but only accounted for 15 percent in 2010. While there has not been much activity in Asia in terms of deals with disclosed values of at least $50 million, there has been a considerable amount of commercial aerospace deal activity for undisclosed values happening in this region.

Though the relative level of cross-border acquisitions increased slightly in Q4 2010, the level of cross-border acquisitions for U.S. targets declined. This is somewhat surprising because, despite substantial defense budget pressure, the U.S. market still accounts for roughly half of global defense spending, a factor which should continue to attract foreign players to U.S. targets.

"We believe that the overall level of aerospace and defense M&A activity will continue to grow for a number of reasons," added Thompson. "The deal market in the A&D sector may not be firing on all cylinders yet, but key factors are in place to support its recovery."

Repositioning for growth: The implications of expanding into an emerging global market

The fourth quarter Mission control report takes a closer look at how globalization is accelerating within the aerospace and defense (A&D) industry. With an established international customer base, the A&D industry is positioned to overcome globalization challenges and reap benefits in commercial markets in Asia-Pacific and defense markets in the Middle East and Asia. Additionally, A&D supply chain markets are opening up in India, Mexico, and Turkey, as well as China, for commercial aerospace, as most emerging country governments also view foreign investment as an important source of capital for their economies.

As military alliances evolve and create opportunities for North American and European companies outside their home markets, defense exports from Western Europe and North America have increased dramatically to Saudi Arabia, the United Arab Emirates, Turkey, Pakistan, Singapore, the Baltic States, Qatar, Malaysia, and Japan.

A range of factors have to be weighed when assessing the growth potential of an emerging market. Every country offers a mix of opportunities and risks. Economic and political stability, varying business regulations, possible inflation, and competition among countries are also factors to consider when assessing whether an investment in an emerging market country will bring disappointment or long-term success.

Most industries are globalizing at increasing speed, and aerospace and defense is no exception. For most A&D companies, the customer base is already international; however, operations, the supply chain, and research & development remain less global than in other industries. A&D companies that adjust their leadership tactics and their approaches to risk management can create competitive advantage.

For information on Mission control and to access the full report, including the special section on globalization 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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SOURCE PwC