Industry Week in Review – June 15, 2012

The U.S. Defense Department could face up to $100 billion in budget cuts under any deficit reduction deal, according to the chairman of the U.S. Senate Armed Services Committee, Senator Carl Levin.  These cuts would be in addition to the $487 billion the Pentagon already plans to reduce its projected spending by over the next 10 years. According to Sen. Levin, areas such as, the nuclear weapon stockpile, could safely handle a decrease in funding, but reductions upwards of $10 billion, over a 10-year period, across the entire DoD, is risky.  Ultimately, defense will have to play some role in a larger deficit reduction package to avoid sequestration of the Pentagon’s budget.

As an effect of these cuts, trans-Atlantic relations are at serious risk should the U.S. plan to kill off development of the Medium Extended Air Defense System (“MEADS”).  The air-transportable MEADS was developed by the U.S., in conjunction with Germany and Italy, to replace the Patriot anti-missile system.  The U.S. previously agreed to fund the program through its “Proof of Concept” phase in 2014, after deciding not to purchase the theater-based missile defense systems. However, with current budget restructuring and reductions, the U.S. National Defense Authorization Act for 2012 requires the funds to be severed, an action that could negatively affect the U.S. relationship with Germany, Italy, and the NATO alliance in the future.

Big Movers

Bombardier Inc. (Up 5.5%) – Shares traded upward this week after an announcement that Series 2 Preferred shareholders, who receive a monthly floating adjustable cash dividend, have the right to convert all, or part, of their shares for a one-for-one basis into Series 3 Preferred Shares, to receive a quarterly fixed cash dividend for the following five years.

AAR Corp. (Down 13.3%) – Shares traded downward this week after an announcement that the Company’s Board of Directors authorized repurchase of up to $50 million of its outstanding shares of common stock.

Relevant Transactions

Mercury Computer Systems to acquire Micronetics, a manufacturer of microwave and radio frequency (“RF”) components and subsystems used in a variety of defense, aerospace, and commercial applications. Mercury pursued the acquisition to “enhance [its] integrated digital and RF subsystem solutions for existing and next generation defense and intelligence programs.”  Mercury’s offer is $14.80 per share, implying an enterprise value for Micronetics of around $75 million.  For its fiscal year ended March 31, 2012, Micronetics reported revenues of $46 million.

Teledyne RD Instruments to acquire BlueView Technologies, a provider of compact, high-resolution, acoustic imaging and measurement solutions.  The acquisition will add unique technology and products to the Teledyne Marine group, whose 11 businesses provide acoustic sensors and communication devices, harsh environment interconnects, and complete autonomous underwater vehicles. Terms of the deal were not disclosed.

Saab acquires Taby Displayteknik AB, a developer of simulator solutions such as, Joint Fires Synthetic Training. The acquisition will establish Saab as a training provider for virtual joint exercises, and is part of its growth strategy to offer a more complete virtual training business. It also complements Saab’s previous acquisition of E-COM, a provider of subsystems for virtual training in virtual joint exercises.  Taby Displayteknik was a subsidiary of ISD Technologies AB, which Saab previously owned 30 percent. Terms of the deal were not disclosed

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