Acquisitions Reshape Aerospace and Defense Industry
A rapidly changing market is prompting U.S. aerospace and defense companies to reinvent themselves by spinning off businesses and buying new, related ones. As a result, the supply chain will morph with many mergers and acquisitions over the next few years.
We’ve already gotten a taste of this with the planned $16.5-billion purchase of Goodrich by United Technologies, the largest industry acquisition in over a decade. Meanwhile, L-3 Communications is spinning off a $2-billion portion of its defense business; and ITT broke up into three companies late last year, including its defense division.
Cutbacks in government spending have already forced some consolidation. In May, GeoEye, a satellite imagery firm, made a hostile $792-million bid for DigitalGlobe. While hostile takeovers have been rare in the defense industry, they will be less so now.
The top contractors have large cash reserves they want to put to work; and, acquisitions provide much more attractive returns than simply holding the cash at low interest rates. Investing in research and development now, when there are few new programs to justify it, doesn’t make as much sense as acquiring companies with government contracts.
The hot business being pursued include: UAVs and ISR (intelligence, surveillance, and reconnaissance). Homeland security, cyber security, health information technology, alternative energy, and commercial aerospace are others.
As commercial aerospace manufacturers ramp up to meet the booming demand for commercial airliners, they may choose to integrate vertically. By acquiring suppliers, a manufacturer can have more control of its production.
This scenario will be played out throughout the entire supply base since prime contractors need subcontractors that provide more complete systems and require less supervision. Primes also are seeking subs with risk-sharing capital. Scalability and a desire to spread overhead to reduce costs, also encourage companies to grow.