Industry Week in Review – March 9, 2018
Aerospace & Defense Update
On Monday, British-based defense electronics manufacturer, Ultra Electronics plc, announced it had terminated its $235 million acquisition of Sparton Corp. Back in 2014, Ultra and Sparton formed a joint venture, ERAPSCO, which designs and manufactures sonobuoys used by the U.S. Navy to track and detect submarines. ERAPSCO was awarded an indefinite delivery indefinite quantity (“IDIQ”) contract in 2014, which will run into 2019, and received $664 million in purchase orders during the contract’s first four years. Through acquiring Sparton, Ultra would have transitioned into the U.S. Navy’s sole-provider of sonobuoys. However, anti-trust concerns were raised by the Department of Justice and supported by the Navy, leading Ultra to terminate the deal.
Estimates from the Pentagon were released this week projecting costs of F-35 joint strike fighter fleet modernization at $16 billion. Pentagon officials will use these estimates to weigh the decision of commencing a bulk buy of the F-35’s from Lockheed Martin or modernizing the current fleet instead. Overall, the modernization efforts are anticipated to cost at least $10 billion over the next seven years, and the U.S. will have a 70% share of the development costs. The detailed Pentagon plan for F-35 bulk procurement is set to be released later this month.
Government Technology Solutions
While a high theme within the government services market is mega-mergers and consolidation, highlighted by the recent GDIT acquisition of CSRA among others, several large publicly traded companies in the sector are instead turning towards M&A for smaller and more focused strategic tuck-ins. Specifically, Booz Allen and CACI International recently stated that they do not feel the need to increase size in order to keep pace with competition. For instance, Booz Allen’s recent acquisitions of SPARC and Aquilent augmented its organic growth strategy by increasing emerging technology and higher-end engineering capabilities, two focus growth areas. Similarly, CACI’s CEO Ken Asbury recently stated that his company’s size, which is currently fourth in total annual revenue, has not hindered their market positioning. While CACI does not feel the need to make a scale-driven acquisition in the near future, the company’s number one priority for cash is M&A. Both Booz Allen and CACI will continue to strategically use acquisitions to steadily improve capabilities without disrupting corporate dynamics.
A recent report from the Brennan Center for Justice has found that the government has made minimal progress fortifying U.S. voting machines against cyberattacks. The report states that 41 states have voting systems that are at least a decade old and approximately 43 states and Washington D.C. plan to use machines that are no longer manufactured for the 2018 midterm elections, the same number used in 2015. With recent cyberattacks making headlines around the world, the government’s legacy systems could be at serious risk during this election season. In addition to being more vulnerable to cyberattacks, legacy systems pose an increased risk because vendors may no longer be able to write security patches for them. While it is nearly impossible to improve voting systems before the midterm elections, the report calls on the federal government to grant states appropriate funding to replace equipment for voter security ahead of the 2020 presidential election.
Big Movers
Rolls Royce (up 14.0%) – Share prices were up this week after the company announced it is on track to meet 2020 goals and will introduce a new cost-cutting program.
Comtech Telecommunications (up 32.2%) – Share prices were up this week after the company reported a strong order backlog and raised its fiscal 2018 forecast for earnings per share.
Transactions
The Acacia Group, who acquired privately held Intelligent Decisions, Inc. (ID) in May of 2017, has split the firm into two standalone companies, Applied Insight, LLC and ID Technologies, LLC.
Compagnie de Saint-Gobain S.A.’s Performance Plastic business has acquired SMS Group’s subsidiary HyComp, LLC, a provider of advanced proprietary components for the aerospace and industrial markets.
