Defense M&A Doubles in 2010

A quarterly report by PwC shows that global M&A activity in the aerospace and defense sector "rose from $10.9 billion in 2009 to $20.2 billion in 2010, nearly doubling year-over-year." An accompanying press release summarizes some main points, including interesting commentary about the continued trend toward international, less U.S.-centric deal activity:

"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."

Private Equity Deals Down 85% in 2008

PricewaterhouseCoopers has released its annual 'Aerospace & Defense Deals' for 2008, and it's bad news for defense private equity investors. While total deals declined from $32.9B in 2007 to $14.3B, private equity transactions collapsed, down to $2.4B in 2008 compared to $16B in 2007. 

We've written here before that the combination of a contracting credit market (read: full blown global economic meltdown) and cash-rich large defense companies makes a poor forecast for private equity firms focused on defense and Government investing. In the worst case, they could get boxed out completely for an extended period of time while the big guys go direct for their strategic acquisitions.

This poses plenty of questions for shops like DC Capital, Veritas, and Paladin that do not have diversified deal coverage like a Carlyle. Mainly, can these defense/govt only shops stay viable on such an anemic market? Could there be any consolidation or fund closures?

Bright spots? Absolutely. The Finmeccanica/DRS 'deal of the decade' highlighted the continued shift toward more aggressive internatioanl deal flow. In fact, "...transatlantic deals dominated the deal totals, accounting for US$9.7bn of deal value with US$7.3bn attributable to European bids for North American targets." What's more: "Deal value in the rest of the world came close to its record US$1.7bn level reached in 2006."

More commentary to follow as we review the report in more detail, including some focus on new PE investors, a further look at international deals, and more on PWC's commentary about the road ahead.