Merger and acquisition (M&A) deal activity in the aerospace and defence (A&D) sector nearly doubled in 2010, reaching US$20.2bn in disclosed deal value, according to the PwC report, Mission control 2010: Merger and acquisition activity in the global aerospace and defence industry.
M&A activity came back strongly after the global financial crisis, bouncing back from a low point in 2009 when deal values totalled only US$10.9 billion. Deal volumes rose 4 percent 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 of over US$1 billion were announced in 2010, compared with two in 2009.
Matt Alabaster, PwC’s aerospace and defence leader for the Middle East said, “Globally, we have seen a return of larger deals, driving total deal value up to pre-crisis levels. Not only are companies spending again, they are spending big. Despite the financial crisis, industry players have established significant cash positions and are now looking to spend it in the search for growth, scale and efficiency. With the return of the capital markets this makes the mega deals possible.
“The Middle East is a hotspot in the global aerospace & defence industry. Faced with declining defence budgets and highly competitive commercial markets, Western suppliers are seeking out growth and investment opportunities across the Middle East. Although it doesn’t feature highly in M&A league tables, the level of partnership, investment and offset activity in the region is increasingly rapidly and attracting some of the best talent.”
Private Equity involvement in the A&D sector increased to 17 percent of deals in 2010. 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. Conditions that support financial investment are improving, including reductions in risk premiums, so we expect private equity participation to return to normal levels in 2011.
Cross-border deals as a part of total A&D M&A activity stayed broadly steady at 28 percent of deal volume. Companies in North America accounted for nearly two-thirds of both the acquirers and targets in 2010, up from only half in 2009. Despite the substantial defence budget pressure being faced in the U.S., the U.S. market still accounts for roughly half of global defence spending.
In contrast, Asian companies only accounted for 15 percent of targets and acquirers in 2010, down from a quarter in 2009. 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.
Matt added, “We believe that the overall level of aerospace and defence M&A activity will continue to grow in 2011. 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.
“The Middle East will see a rise in partnerships and investments in the A&D sector. As the region emerges as both a key hub for commercial aerospace and a major market for defence equipment, the region will see significant investment in localised infrastructure and capabilities.”
Repositioning for growth: The implications of expanding into an emerging global market
The 2010 Mission control report takes a closer look at how globalisation is accelerating within the aerospace and defence (A&D) industry. With an established international customer base, the A&D industry is positioned to overcome inherent globalisation challenges and reap benefits in commercial markets in Asia-Pacific and defence 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, defence 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 globalising at increasing speed, and aerospace and defence is no exception. For most A&D companies, the customer base, sources of production, and research and development are already international; however, operations and the supply chain 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 the globalization in the A&D sector, visit: http://www.pwc.com/aerospaceanddefence .