Mergers & Acquisitions within Aerospace and Defense – Reshaping the Industry

Mergers and Acquisitions within the Aerospace and Defense market have had a large part in shaping the industry. Some organizations have flourished like Northrop and L-3, venerable names McDonnell Douglas and Grumman have gone away, others have changed their stripes and retooled their businesses like General Dynamics and Finmecannica. What has not changed is how this strategy helps increase the speed of change in capability and market position that an organic strategy cannot match.

Rockwell, once an Aerospace company, remade itself into an Industrial Automation company through the acquisition of Allen-Bradley and divestment of its aerospace assets to include Rockwell-Collins. Goodrich, once an Automotive company, has remade itself into a leading Aerospace supplier. BAE Systems (BAES) moved from being primarily a UK-Based company to one with its largest base of operation within the US. The acquisition of Alvis (2004), United Defense (2005) and Armor Holdings (2007) were key to BAES establishing a global land business that reached $12 B by 2008. This part of its product portfolio achieved significant benefit from the conflicts in Iraq and Afghanistan. L-3 under the direction and deal-making of Frank Lanza, grew from a Loral spin-off to a $10 B broad-based Product, Subsystem and System Integrator.

Large US Defense Prime Contractors – Boeing, Lockheed Martin, General Dynamics and Northrop have and continue to employ acquisitions to move into adjacent and new market segments. These include Electronic and Information Systems, Command and Control, Intelligence, Surveillance and Reconnaissance, Sensing, Data Mining and Fusion, Homeland and Cyber Security, IT Services, Cyber Security and Unmanned Systems, Mission Readiness and Sustainment. Lockheed Martin has evolved from building aircraft (now 25% of sales) to a broad array of capabilities to include Maritime and Land Vehicles.

One need not be a market giant to successfully employ an M&A growth business strategy as has been employed by US firms like Moog, Curtis-Wright and Transdigm. Such a strategy can also be used to execute a global marketing strategy, and build a new position on foreign soil to become one of the “in-country” suppliers as has UK-based BAES, Smiths PLC, Cobham, Qinetic and Chemring PLC. A modern day British invasion. Italy’s Finmecannica utilized acquisition of DRS to overcome high barriers to US procurement policy witnessed by foreign companies. Additional benefits also included allowing the broader Finmecannica Group to increase its presence in the US market while creating a strategic marketing opportunity for DRS to expand in global markets overseas.

M&A activity ties closely to the direction of the industry as it relates to market growth or decline in Commercial aircraft sales and Defense expenditures. In the current economic environment, as the Commercial market segment turns up and the Defense market turns down, M&A activity in both segments of the market has increased with a related increased in EBITDA multiples. During a cycle one always hears that companies are getting too expensive, multiples are getting out of hand. However, this is not always looked at in the context of missed opportunities and time to market. How much does it cost to have your strategic plan stymied? As a market consolidates, how many more moves on the chessboard are out there?

As in a chess game, M&A strategy can provide market and product positioning moves, allowing your opponent to move you methodically into a corner – and then, checkmate. It was not always clear from witnessing L-3’s acquisitions, which direction they were going. It did not make sense until perhaps 3 or 4 were made, the first as a beachhead and the others to build breadth and depth. Rockwell’s acquisition of Teldec in Germany was not about technology, it was about market access to European defense programs.

In the end, Mergers and Acquisitions follow strategy, not lead it. Opportunities can come up that you have wished for, but now, are not prepared for. There is seldom a perfect time. Ready or not, you need to get in the game, and help create the future. Otherwise it may define you.

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© Rich Kohler 2010. All rights reserved. For copies, please contact Rich at rich@rich-kohler.com.

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