Thousands of businesses worldwide supply into the multibillion dollar Aerospace and Defense industry. A BCMS-chaired event in New York examined the factors fuelling M&A activity in this globally significant sector.

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Focuson:AerospaceandDefense
Report: Bob Goldsmith, Michael Blumenthal and Alexander Colley
Thousands of businesses worldwide supply into the multibillion
dollar Aerospace and Defense industry. A BCMS-chaired event in NewYork
examined the factors fuelling M&A activity in this globally significant sector
The international Aerospace and
Defense industry is experiencing
a structural change. This is driven
in part by continued pricing
pressures, globalisation and rapid
consolidation – underscored by the
recent announcement that United
Technologies is to sell Sikorsky
Aircraft, the manufacturer of the
Black Hawk helicopter, to Lockheed
Martin for $9bn. Activity on the
SME side of the market continues
to be robust as illustrated by BCMS’
own sector activity: BCMS recently
advised Helmet Integrated Systems
Ltd, a leading supplier to Defense
organisations worldwide, on its sale
to Gentex Corporation.
Bob Goldsmith, BCMS North
America President and CEO,
recently organised and moderated
a prestigious panel event attended
by over 100 industry professionals,
investors and strategic acquirers in
New York City. Panelists included
acknowledged industry experts
Major General Michael H. Sumrall,
(Retired), Rear Admiral Anthony W.
Lengerich, (Retired), Paul Murphy,
Partner at Sentinel Capital Partners
and Tess Oxenstierna, Managing
Director at investment bank
Headwaters. Which factors do these
experts believe are influencing the
market?
Defense: government spending
In the Defense segment, much of the
panel discussion revolved around
the general political environment.
U.S. Defense spending decreased
significantly in recent years as
a result of efforts to reduce the
national deficit and the withdrawal
of forces from Iraq. Despite budget
cuts, the United States remained the
global leader in military expenditure
in 2014 with a spend of $598.5bn –
over three times that of China, the
next leading nation.
While U.S. Defense spending
continues to be vibrant, there has
been an ongoing effort on the part
of U.S. Defense and Aerospace
companies to promote foreign
military sales to offset expected
reductions at home. Defense
budgets in Europe and Australia
might be smaller, but U.S. Defense
companies recognise the need to
increase the size of their overall
share of the global“pie”, given the
shrinking market domestically. In
the UK alone, the Defense sector
saw revenues of £22bn, and its
Aerospace market is the second
largest globally after the U.S., with
more than 3,000 companies.
Growth in commercial aviation
Though often clustered together,
Defense and Aerospace, and
particularly commercial aviation,
really are two different markets.
In the wake of declining Defense
budgets, the commercial sector,
more specifically the aviation
market, has been viewed as a key
growth area with strong demand
during the last few years. In the
face of lower oil prices, many have
started to question the outlook
– the upswing in airplane orders
was influenced strongly by falling

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interest rates and climbing oil
prices. Nonetheless, the commercial
Aerospace industry is projected to
double in 20 years, and investors
can take advantage of tremendous
visibility. The order books for
airplane manufacturers are
publicly available, and backlogs for
commercial aircraft are at record
levels.
Surplus cash, strong market
Despite the headwinds in both the
Aerospace and Defense segments,
2014 was a strong year for M&A,
with 11% growth in transaction
activity over 2013. 2015 is
proving strong, too. The $4.75bn
Exelis acquisition by the Harris
Corporation represents one of the
largest transactions in the industry
since 2011, and one of the five
biggest in the last decade.
As Tess Oxenstierna of Headwaters
noted:“The primary sellers in this
market segment are dominated
by founders and their families.”
Bob Goldsmith added that“This
has made the sector increasingly
important to BCMS, which focuses
on helping founders and their
families manage exits successfully.”
Much current M&A activity is
being driven by a reaction to
current market forces. Companies
are seeking greater scale as they
strive to improve margins through
a reduction in cost inefficiencies
in their supply chain and
manufacturing processes, as well
as acquire stronger platforms for
growth. Additionally, many leading
Tier 1 companies have found
themselves with a surplus of funds.
Strategic acquirers dominate
Although private equity firms are
active in the field, comprising 30-
40% of all deal activity, strategic
acquirers are currently driving the
M&A landscape, led by companies
such as Lockheed Martin, Ultra
Electronics and Landmark Aviation,
each of which made three
acquisitions during 2014.
Rear Admiral Anthony Lengerich
commented on how Defense
technology, in particular, is a highly
sought-after subsector of the
industry, as companies continue to
invest heavily in R&D and search for
acquisitions in emerging fields like
cybersecurity and Unmanned Aerial
Vehicles (UAVs). Companies such
as BAE, Symantec and Raytheon
have all made big moves, with
the latter recently announcing
the completion of a cybersecurity
joint venture with Vista Equity
Partners, and a recent acquisition of
Blackbird Technologies, a persistent
surveillance and cyber security
solutions provider. There is also
substantial cross-over interest from
technology players such as Google,
Amazon and Facebook, each of
which demonstrated interest in
exploring applications for UAVs and
similar devices.
As BCMS’Bob Goldsmith concluded:
“The combination of low interest
rates, lofty stock prices, pent-up
demand for deals, and excess
corporate cash has contributed to a
strong valuation environment – and
this will be encouraging to potential
sellers evaluating their M&A
options. The Aerospace and Defense
ecosystem and supply chain is multi-
tiered and complex, and comprised
of many companies that can benefit
from these current trends.”