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A&D – Opportunistic deals coming for the middle market
When most people think of M&A in the A&D sector, they think big. United Technologies acquiring Goodrich, Providence Equity / SRA, Lockheed / Martin Marietta, Northrop / Litton / Grumman / Westinghouse. These mega-deals have transformed the industry over the past 30 years.
However, A&D is an innovative sector with smaller companies leading development of many new technologies and established middle-market companies bringing product expertise and a track record of service and support to long-lived programs. With continuing uncertainty about government spending, many industry observers believe any discussions about mega-deals will be on hold for the near future. Transactions driven by innovation, particularly in cybersecurity and other defense technology fields, and niche consolidation are more likely in the current environment.
The ability to realize cost savings and to build up capabilities within established programs are key drivers for M&A among middle market A&D companies. Our experience is that many smaller suppliers are struggling through the uncertainty and reduction in military spending and that consolidation will logically follow. As Deputy Assistant Secretary of Defense for Manufacturing and Industrial Policy Brett Lambert told Reuters in an interview a couple of months back, prolonged uncertainty about U.S. military spending was stalling M&A deals, dampening investment and hiring by big defense companies. Lambert said one of his biggest concerns was that banks were increasingly unwilling to lend to smaller defense firms because of fears that their contracts with bigger companies would materialize as quickly and fully as expected.
This environment should create opportunities for middle-market A&D acquirers to consolidate their markets. While primes are expected to continue targeted acquisition activity, those companies who have traditionally played subcontractor roles should see more opportunistic acquisitions coming their way.