Industry Week in Review – February 26, 2016
Aerospace & Defense Update
The chairman of the Senate Armed Services Committee (“SASC”), Senator John McCain, stated he will not authorize the Long Range Strike-Bomber (“LRS-B”) if the procurement is on a cost-plus basis. Senator McCain expressed concern of the additional costs associated with the contract structure and voiced opposition to hear the Air Force’s perspective on the matter. Following the Senator’s remarks, the Air Force revealed the contract will be divided into two parts, cost-plus and firm fixed price. The first phase, which consists of engineering and manufacturing development, is currently structured as a cost-plus with incentives. The Air Force and Senator McCain are scheduled to discuss concerns surrounding the project during closed briefings with the SASC and the House Armed Services Committee in the following weeks.
According to sources familiar with the matter, Honeywell reportedly offered a merger proposal of around $105 billion, including debt, for United Technologies. The industrial titans have a combined $95 billion in annual revenue and share an extended list of overlapping products and customers. Following a decade of consolidation among aerospace suppliers, the two Companies are seeking to increase their leverage with their customers by demonstrating their expansive suite of products and technical expertise. United Technologies expressed concerns around a potential transaction as the merger proposal was a source of unease from major customers and regulators on three continents. However, Honeywell remains persistent and is continuing its pressure on United Technologies to remain engaged in merger talks.
Government Technology Solutions Update
As part of the Department of Defense’s (“DoD”) Third Offset Strategy, it is reaching out to non-defense technology companies to help increase its technological competencies and harness the benefits of recent IT advancements. The biggest challenge the DoD faces is dispelling the perception that government contracting stifles technology advancement given an arduous and time-consuming acquisition process and a limited ability for vendors to develop internal Intellectual Property (“IP”). The Defense Innovation Unit Experimental (“DIUx”), located in Silicon Valley, was created to build and strengthen relationships with innovative companies, identify emerging technologies, and serve as a west-coast presence for the DoD. The department recognizes it has traditionally fallen behind in these areas, and has established DIUx to bolster military capabilities in preparation for technological challenges and opportunities in the future.
The Federal Risk and Authorization Management Program (“FedRAMP”) has postponed launching its high baseline standards for cloud authorization by one to two months in an effort to reduce its existing backlog. Initially, in 2012, FedRAMP successfully vetted cloud providers in six months; today that process takes anywhere from 12 to 18 months, according to FedRAMP Director Matt Goodrich. Part of the slowdown has been caused by an increasing number of Cloud Service Providers (“CSPs”) and Third-Party Assessment Organizations (“3PAO”). To more effectively manage the workload, FedRAMP is working with stakeholders to redesign the authorization process to focus primarily on actual capabilities and security, rather than documentation. Goodrich expects the redesign to “make every authorization happen in less than six months,” and will provide a six-month FedRAMP update within the next two weeks.
Big Movers
United Technologies (Up 10.7%) – Shares were up this week following the news of a potential merger with Honeywell
Zodiac Aerospace (Down 28.4%) – Shares were down this week after the Company forecasted a recovery that will take longer than the 18 months initially planned
Transactions
CAE, Inc. to acquire Lockheed Martin Commercial Flight Training (“LMCFT”), a provider commercial aviation training products and services. Terms of the deal were not disclosed.
General Dynamics to acquire Bluefin Robotics, a provider of unmanned undersea vehicles for customers in the defense, scientific, and commercial markets. Terms of the deal were not disclosed.
Safariland to acquire United Uniform Company, a provider of tactical gear and uniforms for law enforcement and public safety professionals. Terms of the deal were not disclosed.
Stirling Square Capital Partners acquired Mettis Aerospace, a provider of precision forged and machined components for aerospace and defense customers. Terms of the deal were not disclosed.
General Atomics to acquire Ducommun Incorporated’s subsidiary, Miltec Corporation, a provider of engineering, technical, and program management services for advanced weapons systems and military defense systems. The deal is worth an estimated $14.6 million. KippsDeSanto & Co. acted as the exclusive financial advisor to Ducommun Incorporated.
Oracle Corporation to acquire Ravello Systems, Inc., a provider of cloud-based virtualization software applications and solutions. The deal is worth an estimated $500.0 million.
Quantech Services, Inc. to acquire KeyW Systems Engineering and Technical Assistance business, a provider of SETA services to Defense agencies. The deal is worth an estimated $12.0 million.
Rhone Capital to acquire a 45% minority stake in Garda World Security Corporation, a provider of business solutions and security services worldwide. Terms of the deal were not disclosed.
