NEW YORK: Merger and acquisition (M&A) deal activity in the aerospace and defense (A&D) sector was relatively sluggish in Q2 2010, according to the PricewaterhouseCoopers LLP report, Mission control: Second-quarter 2010 global aerospace and defense industry mergers and acquisitions analysis.
In Q2 2010, the A&D sector saw significant activity in the middle-market and large-deal segments of the market, however, mega-deal activity was nonexistent during the quarter.
While the pace of deal activity in the A&D sector, as measured by the volume and value of transactions, remains above the recession lows of Q1 2009, the overall deal market recovery took a relative pause in Q2 2010. During the quarter, there were seven announced deals worth $50 million or more, compared to the eight deals reported in Q1 2010. Additionally, the total value for announced deals in Q2 was $2.2 billion, a significant decline from the $5 billion in total deal value from the first quarter of this year.
“The M&A deal environment within the aerospace and defense sector experienced a loss of momentum during Q2, but we expect a gradual increase in activity throughout the rest of this year,” said Scott Thompson, U.S. aerospace & defense leader at PricewaterhouseCoopers. “Lots of cash, improved capital markets and a recovery in the global economy will likely help drive overall deal totals in the sector, which makes us cautiously optimistic as we look ahead to the second half of 2010.”
Despite the decline in deal activity, one noteworthy trend was the reemergence of U.S. entities, which became more active in the deal market during Q2 2010 compared with 2009 and Q1 2010 when measured by their relative participation in announced deal volume and value. The increased involvement from U.S. entities may be attributed in part to the release of the U.S. Quadrennial Defense Review, which is eliminating some of the uncertainty surrounding upcoming defense spending priorities.
In Q2 2010, average deal values edged downward compared to the previous quarter and full year 2009, primarily due to the absence of mega-deals (deals with a disclosed value of at least $1 billion). This represents a decline when compared to the two mega-deals announced in the first quarter of 2010 and full year 2009. Despite the drop in mega-deals, the pace of activity in large and middle-market deals is similar to Q1 2010 and 2009, however; the majority of deals were those with undisclosed values or those with disclosed values under $50 million.
Additionally, the absence of activity by financial acquirers during the second quarter is notable and represents a departure from their relative level of activity in 2009 when they accounted for nearly 11 percent of deals worth $50 million or more and in Q1 2010 when they accounted for 20 percent of deals. Looking ahead to the second half of 2010, strategic acquirers will likely continue to dominate deal-making with intermittent increases in financial investment.
From a regional perspective, the distribution of deals by target region indicates that the relative number of deals for targets in the Asia and Oceania region has declined over time in favor of deals targeting North American entities. This trend is associated with the resurgence of deals involving U.S. entities. Specifically, of the seven deals worth $50 million or more announced during Q2 2010, five involved U.S. acquirers and four involved U.S. targets.
Capturing Synergies to Maximize Deal Value
The second quarter Mission control report takes a closer look the importance of the merger integration planning process, especially in today’s recovering economy. Aerospace and defense companies must balance a desire to quickly reach the finish line with a need to systematically leverage synergies and contain costs.
For A&D companies that work on government contracts, there is the added complication of obtaining internal operating system certifications for both entities and an overall harmonizing of contract compliance procedures and policies. International Traffic in Arms Regulations (ITAR) and the Foreign Corrupt Practices Act (FCPA) regulations can further complicate the merger integration process for companies looking at commercial, defense and general aviation acquisitions in Asia, particularly in China and India.
Closing deals is tough, but capturing deal value is even tougher. In some ways, deciding whether to go forward with a merger or acquisition is the easy part, and the act of “owning” after the transaction is complete is the real challenge. In the end, the market will reward or punish shareholders of the combined company depending on how well its management succeeds at achieving stated deal objectives. For this reason, it is imperative that synergies are realized, deal value is captured, and the resulting performance is communicated to all those with a stake in the outcome.
PwC’s Aerospace & Defense practice is a global network of professionals who provide industry-focused assurance, tax and advisory services to leading aerospace & defense companies around the world.
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