2013 Aerospace / Defense M&A Activity Wrap-Up
M&A activity in the aerospace / defense industry in 2013 was decidedly mixed. The headline is that 158 industry transactions were announced during the year, down from 2012’s 177 transaction announcements (see chart below). Essentially all of this decline in transaction volume was attributable to activity involving companies primarily serving the defense sector, where the number of deals slid from 77 to 58. Deal volume involving target companies operating primarily in the commercial aerospace sector, on the other hand, was flat (albeit at a very high level), with 100 announced transactions in both 2013 and 2012. Clearly, the uncertain defense budget environment had a significant impact on deal activity in 2013.
Valuations are extremely difficult to generalize since there is a greater amount of buyer selectivity than there has been in previous years. But general valuation trends mirror the trends in volume – multiples for transactions involving defense companies settled into a lower range, while multiples in the aerospace sector remain at cyclical highs.
From a size perspective, 2013 witnessed the continuation of a trend that has prevailed in the aerospace / defense industry for several years: the predominance of middle-market sized deals. Fully 97% of the transactions in the industry were for enterprise values of less than $500 million (see chart below). Moreover, mega-deals of greater than $1 billion in enterprise value were few and far between, with only two such transactions (Rockwell Collins’ acquisition of ARINC for $1.4 billion and Textron’s acquisition of Beechcraft for $1.4 billion) announced in 2013.
What do we predict will happen for aerospace / defense M&A activity in 2014? The commercial aerospace market continues to roar along, with healthy backlog and strong visibility for years’ worth of production. Barring an economic slowdown, we would expect transaction volume to proceed at already robust levels, with perhaps a pause in valuations that seem to be cresting. In the defense sector, one of the factors that created the biggest drags on activity in 2013 – the lack of certainty around the budget / funding environment – has been removed with the budget deal struck in December 2013. We predict that this will loosen the constraints on deals in 2014, providing a confidence boost to buyers eager to do strategic deals. That said, the defense market is still in the early stages of an anemic “growth” cycle, which will put a crimp on super-premium valuations.
M&A Deals by Announce Date and Size
Source: CapitalIQ and KippsDeSanto Research