Jane’s Analyzes M&A Activity in the Defense Industry

Jane’s predicts that deal volume will hold steady in 2008. “We don’t believe deal activity will drop significantly,” Anderson says, “as strategic investors—the defense companies themselves—remain keen to do deals, and the high defense budgets of recent years have created some very cash-rich companies.” The outlook continues positive, he says, especially for smaller companies whose capabilities are anticipated to be in demand. “Jane’s believes that 2008/2009 will mark a peak in terms of U.S. spending, although there is a bow-wave of funding from previous years that has carried forward. The supplemental spending necessitated by the conflicts in Iraq and Afghanistan is also expected to drop out by around 2012. Leaner times, as we saw in the 1990s, prompts consolidation as companies look to position themselves for best advantage.”

Competition for deals has driven up the values of target companies, but market forces could drive those values down in 2008. The aerospace and defense sectors were much sought after by private finance in 2006 and 2007. Anderson notes that “the sector was very much en vogue among private equity firms.” He sees two reasons for this trend. “Firstly, the industry offers a high degree of forward visibility, because contracts run relatively far ahead and demand is relatively predictable. Secondly, the accommodative financial environment and ‘cheap money’ of recent years put PE firms in a good position to do deals.” In contrast, he adds, “the current uncertain financial climate and credit crunch will make it harder for PE firms to do deals. Reduced demand could potentially slacken the values of target companies.”

The upcoming U.S. presidential election is not expected to have a major impact of the M&A drive in the short to medium term. Anderson says, “We believe procurement spending will need to continue to recapitalize the U.S. inventory in order to maintain readiness. New programmes, however, will come under pressure regardless of who occupies the White House.”

These topics will be the focus of the Jane’s U.S. Defense Conference on April 22, 2008, in Washington, D.C. Key themes include:

Challenges to the priorities for the next administration
Lessons from the period since 2001 and challenges for 2009 and after
Is a cyclical downturn due or are the expenditure dynamics changing?
The shape and size of the U.S. defense budget after Bush
The defense industry from 2008 to 2012—meeting U.S. defense requirements and U.S. defense in the wider world
Geopolitics 2008–2012—impacts on the U.S. and U.S. impacts elsewhere: the Gulf, the wider Middle East, South Asia, Europe, and the Pacific.

For more information about the conference visit the Jane’s website at http://www.janes.com/events/conferences/

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