Merger and acquisition activity in the global aerospace and defencesector declined by more than 50% in 2008, but acquisitions of North American companies by European counterparts reached a record high for this decade, saysan analysis conducted by PricewaterhouseCoopers.
PwC data shows total deal value fell from $32.9 billion in 2007 to $14.3 billion in 2008, buttransatlantic deal flow accounted for $9.7 billion, of which $7.3 billion was European bids for North American targets. Thisputs such acquisitions at their highest level since 2000.
GOING WEST
Dollar weakness was not the only factor in North America's attractiveness, saysPwC partner Neil Hampson. "I think the East to West money flow is all around accessing what is a much larger pool of defence spending," he says, adding that the change of administration is unlikely to alter that situation. "There's not a great deal of scope to cut defence spending. It's as good as any other public works project: it's about skills and jobs and value added."
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In four of the five biggest deals involving North American targets, the acquiring company was European. The $5.6 billion sale of New Jersey-based defence electronics company DRS Technologies to Italian giant Finmeccanica was not only the aerospace and defence sector's biggest deal of 2008, but its third biggest of the decade. The other three deals all involved UK companies: Clyde Blowers acquired Textron's fluid and power division for $645 million; missile defence industry player Sparta was picked up by Cobham for $416 million; and Hampson boosted its Boeing 787 programme involvement when it bought Odyssey Industries and corporate sister Global Tooling Systemsfor $322 million.
In 2007, deals involving North American targets had totalled $23.9 billion, of which North American investors accounted for a 65% share. In 2008 they accounted for just 20% of $9.3 billion. Nor were North American investors particularly active internationally. General Dynamics' $2.2 billion move for Permira's business aviation services provider Jet Aviation was one of only two deals completed in 2008; the other wasKaman's $85 million purchase of UK-based Brookhouse Holdings.
PRIVATE EQUITY RECEDES
The global M&A fall-off reflectsa collapse of private equity investment, which plunged from $16 billion in 2007 to just $2.4 billion last year, including the $2.2 billion paid for Jet Aviation, the only billion-dollar deal of 2008, compared with seven in 2007. Private equity's share of deal value dropped from 49% to 17%.
PwCpredicts deal-making will remain "very subdued" in 2009, with preservation of cash a common priority and uncertainty surrounding the extent to which values will fall. However, it warns,a growing number of smaller companies may be forced into deals.
Lack of leverage will continue to constrain private equity buyers. "Where it plays a role, private equity investments are much more likely to be undertaken in concert with management teams, through specificallydesigned funds, minority investments or joint ventures," says PwC.
The consultancy's report also raises the possibility that, post-Boeing 787 and Airbus A400M, "M&A activity may be influenced by the possibility of a 'back to basics' approach for future platforms, with a degree of vertical integration returning to favour".Either way, PwC expects North America to remain "a key market" for European companies seeking expansion. "Such moves are strategic and will not necessarily be constrained by exchange rate trends,"it concludes.
Source: Flight International