Industry Week in Review – December 22, 2017
Aerospace & Defense Update
Boeing confirmed it is in talks to acquire Brazil-based Embraer SA, a maker of small jetliners, business jets, and military aircraft. The potential acquisition would give Boeing access to jetliners that are smaller than its traditional product range and position. Initial estimates place the cost of the Embraer acquisition around ~$9 billion, inclusive of debt. The deal would position Boeing to compete directly with Airbus in the small commercial aircraft market after Airbus’ expansion into the 100 to 150 seat jet market through its joint venture with Bombardier. The acquisition could also prevent fast-growing Chinese aerospace companies from gaining a stronger global foothold in the regional and single-aisle passenger jet market. In order for the acquisition to occur, it must be agreed upon by the Brazilian government, which has a “golden share” in Embraer, giving it veto power over any potential sale or joint venture.
On Thursday, Congress avoided a pre-Christmas government shutdown by passing a continuing resolution (“CR”) through January 19th to extend budget funding through January 19th. The CR will allow the government to continue operations at GFY2017 funding levels. Included in the CR is a measure granting an additional $4.7 billion in supplemental military funding to increase ballistic missile defense systems and repair damaged warships. This marks the third CR passed this year by Congress and further postpones negotiations of key issues such as a full-year appropriations bill for the Department of Defense (“DoD”).
Government Technology Solutions
The Department of Defense has not yet finalized a decision on how to approach the contracting process for a planned multi-billion dollar cloud infrastructure project. The DoD ideally wants to move as much of its IT infrastructure to the cloud as possible as it believes that enterprise-wide cloud adoption would provide considerable scale, enabling more advanced data analytics, increased application of machine learning, and the ability to more quickly share mission-critical information with warfighters. The DoD initially planned on using a single vendor for the cloud infrastructure. However, according to industry insiders, there has been considerable backlash against this approach. Some believe that a “one-size fits all” approach is not sufficient given numerous and various missions that would be relying on uniform infrastructure. In addition, others worry that using a single supplier increases the risks and subsequent consequences of any sort of system failure, and that using multiple vendors provides a way to mitigate that risk. The DoD has not yet committed to any one acquisition strategy, but is planning on holding an industry day and issuing a draft request for proposal (“RFP”) in early 2018.
Kaspersky Lab, the Russian multi-national cybersecurity firm and anti-virus provider, has filed a lawsuit against the United States following the Federal Government’s decision to ban Kaspersky software from use by all federal civilian agencies. The Department of Homeland Security (“DHS”) originally issued an order to remove Kaspersky software from federal networks in September, but the decision was signed into law last week as part of the 2018 National Defense Authorization Act. U.S. officials believe, that as a result of alleged ties between Kaspersky and the Russian government, the software could potentially compromise national security. Eugene Kaspersky, the CEO and founder of Kaspersky Lab, has denied any such improper connection with Moscow. He claims that the U.S. government did not follow due process in its decision to ban his company’s software, and that there was not sufficient evidence to substantiate any of its claims. Mr. Kaspersky has said, that while direct sales to the Federal Government historically accounted for a small portion of the company’s overall revenue, the ban has damaged the company’s reputation and subsequently adversely affected its commercial business.
Big Movers
Embraer (up 23.5%) – Share prices were up this week after the company announced it was in talks with Boeing regarding a potential acquisition.
AAR (down 5.7%) – Share prices were down this week as the company reported second quarter earnings below consensus estimates.
Transactions
DC Capital Partners has acquired Janus Global Operations, LLC, a provider of integrated stability operations support services, including risk management, logistics, and munitions and environment services to government and commercial customers. Terms of the deal were not disclosed.
Element Materials Technology Group has agreed to acquire Metals Testing Co Inc., a provider of non-destructive testing services to the aerospace industry. Terms of the deal were not disclosed.
Mercury Systems, Inc. has agreed to acquire Themis Computer, Inc., a provider commercial, Size, Weight, and Power (“SWaP”)-optimized rugged servers, computers and storage systems for U.S. and international defense programs. KippsDeSanto served as the exclusive advisor to Themis Computer on this transaction. The deal is worth an estimated $180 million.
Molex, LLC has acquired Triton Manufacturing Company, Inc., a provider of flexible power cable assemblies and custom bus bars used in a wide range of current and heat transfer applications. Terms of the deal were not disclosed.
Perusa Partners has agreed to acquire SCHROTH Safety Products GmbH, a provider of a wide range of restraint systems used on commercial airplanes, including traditional two-point lapbelts and three-point shoulder belts. Terms of the deal were not disclosed.
