The increase sees the value of M&A activity in the sector soar to a new decade high
Merger and acquisition (M&A) activity in the defence and security domains was valued at USD82 billion during 2018, representing a 36% increase of the 2017 USD60 billion total. This is the second consecutive record year of the present decade.
The total was pushed to a new high by a series of market-changing transactions during 2018, as the trend for transformational deals continued. The number of ‘transformation deals’ (those valued at USD500 million or more) more than doubled year on year during 2018 to 13, compared to 6 in 2017.
The 12 months saw L3 Technologies and Harris Corporation announce a “merger of equals” valued at USD33 billion and Science Applications International Corporation (SAIC) pursue a USD2.5 billion purchase of military engineering and logistics group Engility (completed in January 2019).
Sharp decline in European transactions bolsters North American market share
During 2018, 55% of transactions involved a target based in the US or Canada, up from 49% in 2019, with US growth attributable in part to reinvigorated defence spending. However, the increase in the overall share was largely attributable to a sharp decline in the number of European transactions, with the sluggish performance arguably reflecting a sharp slow-down in UK activity.
Beyond Europe and North America, sustained activity in other markets was apparent with the rest of the world accounting for 19% of 2018 transactions (up from 16% in 2017). This reflects growing maturity in emerging markets and efforts to create private-sector scale in countries such as India.
Buyers continue to target organisations providing services below the systems integration level, while service-provision organisations offer increasing prospects to purchasers.
35% of 2018 purchase targets fell into the category of providing manufacturing, repair or engineering systems below the systems integration level. Other targets of note include those with exposure to electronic or C4ISR domains, which accounted for 28% of transactions in 2018.
Of note during the year was the increased emphasis on targets with exposure to the provision of services in areas such as logistics, training, maintenance or facilities management. Such companies accounted for 15% of deals; up from 12% and 13% in 2017 and 2016 respectively. The changing requirements of customers has been a factor driving this trend, together with the attraction of generally higher margins in the service sectors compared with the cost-squeezed production and engineering domains.
2019: What’s next?
The extent to which transformational consolidation will continue in the US is open to question given limited head-room for further activity. Regulators appear to have adopted a harsher line in scrutinising mergers and acquisitions for anti-competitiveness and have proven willing to wind back consummated transactions.
Beyond the US, the outlook for 2019 activity in Europe is harder to judge as a result of tightening inward investment rules in major markets such as the UK and Germany. However, an accord of January 2019 through which Rheinmetall was to take a 55% stake in BAE Systems’ UK combat vehicles business suggest that there is still headroom for market-shifting activity.
All figures are in current year USD. A version of this text originally appeared in Jane’s Defence Weekly.