Aerospace and defense industry set for M&A take-off

Aerospace and defense industry set for M&A take-off

Companies in the aerospace and defense (A&D) industry are in the perfect position for an M&A boom, according to a new Deloitte report. Opportunities to consolidate at a supplier level will help firms increase competitiveness and take advantage of new technologies to maximize revenue in 2012.

Deloitte's report, "Three Keys to M&A Effectiveness for A&D Executives: Capturing the Full Value of Strategic Acquisitions", says that there is pent-up demand, available capital and favorable valuations in the A&D industry. However, rushed mergers in the past have proved ineffective, so companies are advised to do their research and plan carefully to ensure their M&A strategy is effective.

Recent research on M&A across multiple industries found that as many as 70 per cent of transactions do not create long-term value for the firms involved. But with a 'stockpile' of cash in the A&D industry, there are real opportunities for executives to expand their horizons through M&A activity."

Over the past ten years we've seen the A&D industry stockpile cash as a result of success in continued operations, exhaustion of other cash deployment activities and economic uncertainty," said Marty Hartigan, principle at Deloitte Consulting LLP and the report’s co-author. "M&A activity looks more appealing now as a cash deployment strategy after years of stock repurchases, dividend increases and discretionary contributions to pension obligations."

Better competitive positioning of the company is essential at a time when government contracts are under increasing scrutiny. President Obama has announced defense cuts of $487 billion over a decade, a reflection of the drawdown of two wars in Iraq and Afghanistan and the pressure to cut national debt." Recent US Department of Defense budget cuts have brought renewed focus to competitive positioning," said Tom Captain, vice chairman, Deloitte LLP and U.S. aerospace and defense leader. "Defense contractors need a strategy for growth to fill the pending revenue gap. Carefully planned and executed acquisitions can provide a transformational opportunity to gain new customers and to get into new products and services in this post-Iraq war era."

The Deloitte report highlights three key areas for A&D executives to focus on when preparing their M&A strategy. First, manage the demand of integration by limiting the total number of acquisitions - while integration has its advantage, you have a better chance of competing if you remain specialist in your area. You can make M&A central to a company's growth strategy by implementing meaningful acquisitions; and target companies with business models that enhance the acquiring company's market position.

New technology is the ideal arena for enhancing your position and the Deloitte experts point to cyber and unmanned A&D advances as a key area for growth. You might also like to look into Intelligence Surveillance and Reconnaissance (ISR), precision attack, mission assurance and logistical and energy service.

 

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