KippsDeSanto & Co. Industry Week in Review – June 14, 2019
Industry Week in Review – June 14, 2019
Aerospace & Defense Update
This past week, United Technologies Corporation (“UTC”) doubled down on the aerospace market with an all-stock deal to merge with defense contractor Raytheon Company (“Raytheon”). The combined company, valued at more than $100 billion, would be the world’s second-largest aerospace and defense company by sales behind Boeing, with annual revenue of approximately $74 billion. The combined entity plans to produce a wide array of products ranging from engines and seats for the F-35, to Patriot missile launchers and space suits. The proposed deal intensifies the consolidation in the aerospace and defense industry as plane makers seek better terms from suppliers and the U.S. government puts greater pressure on contractors to cut costs and invest in new technologies, such as space systems and cybersecurity. The new company will be named Raytheon Technologies Corp. UTC shareholders will own 57% of the shares and UTC plans to appoint eight of the 15 new directors. Raytheon shareholders will own the remaining 43% of the combined company, and Tom Kennedy, Raytheon Chairman and CEO, will be appointed Executive Chairman.
Members of the House Armed Services Committee passed a $733 billion defense policy bill with a final vote of 33-24. This concluded a series of debates throughout the week, as HASC Committee Chairman Adam Smith was ultimately able to push through his plan despite some opposition. Republicans have been calling for a $750 billion budget, arguing that this number would keep in line with the 3 to 5 percent growth needed to keep pace with Russia and China. Specifically, the U.S. is concerned about the continued development of next-generation weaponry. Democrats have argued that this bill represents strong yearly growth. Among things that were included were a 3.1 percent pay raise for troops and funding for the new Space Corps in the Air Force. Within the Senate, Republicans have already set their authorization bill draft at $750 billion. The bill will now move on to the full House, which will vote next week, while the House and Senate are expected to work on a compromise draft throughout the summer.
Government Technology Solutions
Over the past five years, cybersecurity has materialized as one of the U.S. Government’s most pressing concerns. Outside of traditional defensive measures, thanks in part to the National Defense Authorization Act of 2019, an empowered Cyber Command has driven American interests to focus on expanding into more aggressive defensive as well as offensive measures to protect IP and deter adversarial provocations. In addition to securing national data, increased funding and focus on cyber priorities has trickled to other areas of technological modernization and has been an instrumental driver in the switch from legacy systems to the cloud. This continues to be a large focus area government-wide and in particular within the intelligence community (“IC”). According to principal deputy director of national intelligence, Sue Gordon, “the advances we’ve made in security are probably what have allowed the greatest movement in mission.” While there has been a large ideological shift regarding the importance of cybersecurity and conversion to the cloud, the majority of the $90 billion in annual government IT spend goes toward older data centers that are especially vulnerable to hackers. Thus, increased spending on cloud initiatives is likely to continue in the foreseeable future across all government agencies.
Raytheon Company (Down 4.6%) – Shares decreased after analysts lowered stock ratings and cut price targets in response to the company’s announced merger with United Technologies Corporation.
Spirit AeroSystems Holdings, Inc. (Down 6.8%) – Shares decreased after analysts turned bearish on the commercial aerospace original equipment manufacturer (“OEM”) sector due to ongoing uncertainties related to the grounding of Boeing Co.’s 737 Max jets and associated aerospace supply chain risks.
AeroVironment, Inc. has acquired Pulse Aerospace, LLC, a provider of small VTOL UAS technology. The deal is worth an estimated $25.7 million.
DLH Holdings Corp. has acquired Social & Scientific Systems, Inc., a provider of health solutions in clinical and biomedical research, epidemiology, health policy, and program evaluation. The deal is worth an estimated $70 million. KippsDeSanto & Co. acted as the buyside advisor to DLH.
EMCORE Corp. has acquired Systron Donner Inertial Systems, Inc., a provider of quartz microelectromechanical systems (“QMEMS”) used in inertial sensing products that provide precision guidance, navigation and locational systems. The deal is worth an estimated $25.8 million.
Hanwha Aerospace Co., Ltd., has agreed to acquire Edac Technologies Corp., a provider of precision components for aircraft engines and airframes. The deal is worth an estimated $297.2 million.
Héroux-Devtek, Inc. has acquired Alta Precision, Inc., a provider of high-precision landing gear components. The deal is worth an estimated $17.3 million.
IIA Technologies Corp. has acquired KeyLogic Systems, Inc., a provider of R&D technology management, business intelligence (“BI”) data analysis and visualization, software and system engineering, cloud implementation, and biometrics solutions. Terms of the transaction were not disclosed.
United Technologies Corp. has agreed to merge with Raytheon Company, a provider of premier systems with advanced technologies to address rapidly growing segments within aerospace and defense. The deal is worth an estimated $93 billion.