Industry Week in Review – October 12, 2018
KippsDeSanto & Co. Industry Week in Review – October 12, 2018
Summary
TransDigm has entered into an agreement to acquire Esterline Technologies Corporation for $4 billion. After key aerospace and defense providers have experienced production issues, the Pentagon is partnering with the Intelligence Community to identify and improve shortcomings in companies’ supply chains. Google has announced it will not submit a bid for the $10 billion JEDI cloud contract due to potential conflicts with its corporate values and IBM files a pre-award protest of the contract. The Government Accountability Office released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s portfolio of weapon systems.
Aerospace & Defense Update
On Wednesday, TransDigm Group Inc. announced that it had entered into an agreement to acquire Esterline Technologies Corporation for a total consideration of approximately $4 billion. Esterline provides engineered components, sensors, and specialized parts to the jetliner industry. The company has strong customer relationships and is a sole-source supplier of certain parts to Boeing and Airbus. TransDigm’s equity purchase price of $122.50 per share represents a 38% premium to Esterline’s closing stock price the day before the transaction was announced. The acquisition continues a trend of industry leaders paying large multiples to condense their supply chain to achieve cost-saving synergies, and TransDigm hopes the acquisition will strengthen its supply chain, cut costs, and increase productivity.
The Pentagon and the Intelligence Community (“IC”) are partnering to audit domestic aerospace and defense companies’ supply chains to identify and improve shortcomings that could hamper U.S military readiness. The Pentagon is particularly concerned about the industry’s ability to effectively increase weapons production and supply a conflict. Boeing’s recent 737 production issues reinforce the need to ameliorate supply chains, as shortages of various production inputs spanning from metal casting to circuit boards have hindered manufacturers’ ability to meet growing demand. Production issues have affected both upstream and downstream suppliers as key providers such as Spirit AeroSystems, GE Aviation, and United Technologies have all experienced production issues, citing late delivery of materials as a contributing factor to their delays. The Pentagon is incentivizing contractors to elevate their performance by offering bonuses for on-time deliveries and are simultaneously diligently working with industry leaders to foster communication and resolve these issues.
Government Technology Solutions
On Monday, Alphabet Inc.’s Google announced it will not submit a bid for the 10-year, $10 billion single-vendor DoD JEDI cloud contract because it may present potential conflicts with its AI principles. The withdrawal comes only a few months after the company decided it will not renew its AI contract with the DoD following significant internal complaints from employees. Google said they would have submitted a compelling solution for the portions that align with its values and fall within its scope had the contract been open to multiple vendors. The company was among a handful of tech giants in the hunt for the cloud contract, including Amazon Web Services, Microsoft Azure, IBM, GDIT (formerly CSRA) and Oracle—many of which have also expressed their displeasure with the winner-take-all award structure. In related news, this Wednesday, IBM filed a pre-award protest on JEDI, following Oracle’s pre-award protest of the contract earlier in the year. IBM is challenging the contract’s request for a single cloud environment for 10 years, as well as the RFP’s stringent requirements, which “mirror one vendor’s internal processes” and “restrict the field of competition”, according to IBM General Manager Sam Gordy. The final deadline for bids is Friday, with the awardee to be selected next April unless the protests cause the timeline to be extended.
This past week, the Government Accountability Office (“GAO”) released a report detailing a series of cyber vulnerabilities associated with the Department of Defense’s (“DoD”) portfolio of weapon systems. Because automation and connectivity are fundamental enablers of the DoD’s military capabilities, the potential for cyberattacks poses a serious threat to all network-based weapon systems. According to the report, testers attempting to breach weapons systems routinely were able to gain access to a variety of network connected defense platforms, within one hour; and were then able to take full control of, after a day, manipulating the platform’s system by changing or deleting data. With the report heavily criticizing defense officials for their lack of foresight in developing cyber capabilities for weapon systems, the Pentagon will have to move quickly to address these vulnerabilities. As the GAO prepares to brief Congress on its classified findings, the DoD will receive yet another reminder of the importance of increased cyber functionality and the proactive development of systems to keep up with rapid technological changes.
Big Movers
Astronics Corporation (down 20.7%) and Triumph Group (down 15.6%)– Share prices were among the hardest hit in the Aerospace, Defense and Government Services market after this week’s selloff, which resulted in the worst week for U.S. stocks since March.
Transactions
AE Industrial Partners has acquired The Atlas Group, a provider of manufactured complex assemblies for commercial, business, and military aircrafts. Terms of the deal were not disclosed.
Celestica, Inc. has agreed to acquire Impakt Holdings, a provider of manufacturing solutions for leading OEMs. The deal is worth an estimated $329 million.
Cognosante, LLC has acquired J.Lodge, LLC, a provider of integrated solutions that improve the customer-care experience using artificial intelligence, driven speech analysis, and industry-leading software to analyze contact center interactions and find insights. Terms of the deal were not disclosed.
Decision Point Corporation has acquired CORTEK, Inc., a provider of systems engineering, software engineering, cyber support, and technical analysis and documentation to the Department of Defense, Department of State, and other government agencies. Terms of the deal were not disclosed.
FLYHT Aerospace Solutions Ltd. has acquired the Assets of Panasonic Weather Solutions, a provider of satellite communications systems, aircraft tracking, and Tropospheric Airborne Meteorological Data reporting. The deal is worth an estimated $8.4 million.
Maximus, Inc. has agreed to acquire the Citizen Engagement Centers divestiture of General Dynamics Information Technology, Inc.,a provider and operator of centers that handles government services inquires and management. The deal is expected to be worth an estimated $400 million.
Ravn Air Group has agreed to acquire Assets of Peninsula Airways, Inc., a provider of airline operating schedule passenger and charter throughout Alaska. The deal is worth an estimated $12.3 million.
Seemann Composites, Inc. has acquired Materials Sciences Corp., a provider of products and services to study advanced materials and structures. Terms of the deal were not disclosed.
TransDigm Group, Inc. has agreed to acquire Esterline Technologies Corp., a provider of engineered products and systems for aerospace and defense customers. The deal is worth an estimated $4.064 billion.
