Aerospace and Defence Sector M&A Deal Value Nearly Doubles in 2010

Merger and acquisition (M&A) deal activity in the aerospace and defence (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 Defence Industry.


The report says that total deal value in the sector rose from US$10.9 billion in 2009 to US$20.2 billion in 2010, nearly doubling year-over-year. Deal volume remained steady, rising 4% from 2009 to 308 announced deals in 2010, the highest annual total in more than 10 years.


In Q4 2010, there were 17 announced deals, over US$50 million, representing the highest quarterly total during the past three years. Additionally, four mega-deals, over US$1 billion were announced in 2010, compared with two in 2009.


In total, there were five completed private equity acquisitions with disclosed values over US$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.


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% and 28% of deal volume, respectively.  Asian companies represented a quarter of targets and acquirers in 2009 but only accounted for 15% in 2010. 


While there has not been much activity in Asia in terms of deals with disclosed values of at least US$50 million, there has been a considerable amount of commercial aerospace deal activity for undisclosed values happening in this region.


Commercial aerospace has recovered from the economic downturn faster and stronger than nearly anyone predicted.  That sector is looking to capitalise on a growing market and a changing landscape, as the customer base shifts toward the Asia Pacific region and the industry responds to new competitors, particularly Commercial Aircraft Corporation of China in China. 


"The conditions are in place for financial investors to become more active this year, and China's efforts to build a domestic aerospace industry will provide an impetus for additional deals," says Scott Thompson, PwC's U.S. Aerospace & Defence Leader.  "These influences are likely to increase because of strong cash reserves within the sector and better capital market conditions."


For 2011, defence companies are expected to continue to reposition their portfolios to better handle substantial budget pressures.  The U.S. market still accounts for roughly half of global defence spending and the US Government recently proposed a defence budget of US$671 billion for fiscal 2012.  This includes US$553 billion in discretionary budget authority to fund base defence programs and US$118 billion to support overseas contingency operations, primarily in Afghanistan and Iraq.


The US Department of Defence has indicated it's not in favour of consolidation that creates sole source suppliers.  Therefore consolidation among the top ten global defence contractors is unlikely.


"Although consolidation amongst the top ten global defence contractors is unlikely for competitive and security reasons, we believe, it is possible there could be consolidation of large companies beyond that group." says Scott Thompson.





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