Aerospace, Defense and Government Services M&A Rocketing in First Quarter of 2019

24 April 2019 – M&A activity in the Aerospace, Defense, and Government Services (ADG) sector had a strong start in 2019 and is expected to remain robust, according to Hogan Lovells Deal Dynamics report. The sector hit US$4.3 billion in cross-border deal value for the first quarter of 2019 - far above the US$1.4 billion quarterly average since 2010.

"The growing global demands for air travel and defense expenditure as well as the increasing importance of technology and data, continues to propel M&A in the ADG sector to new heights," said Carine Stoick, partner at Hogan Lovells.

Three main trends driving cross-border deal volume and value are highlighted below:

Defense expenditure

A resurgence of global military spending will continue to fuel M&A activity, with the U.S.’s national defense spending alone earmarking US$750 billion for fiscal year 2020, up from US$582.7 billion for 2017. As geopolitical risks increase worldwide, others including China and Germany are following suit. Taken together, NATO's European members spend on defense leapt to a five-year high last year and this trend is expected to only continue. 

Some of the most interesting deals last year involved acquisitions of cybersecurity, IT and space companies. Obviously cybersecurity threats have become a major concern for both companies and countries. Recent measures to protect strategic interests on national security grounds reflect this concern.

Aerospace activity

Aerospace is another area that has seen some high volume activity over the past two years, with giants Airbus and Boeing further solidifying their hold over the commercial aviation market through joint ventures. Original Equipment Managers (OEMs) are moving away from mergers that aim to save costs, instead striking deals that acquire new technologies and enter markets they would otherwise not have access to. In January, Boeing struck a US$4.2 billion deal for an 80% stake in Brazil's Embraer’s commercial aviation business. This type of consolidation wave could affect their suppliers, increasing the consolidation pressure among suppliers with the view to improving their negotiating power with the OEMs. UK suppliers in particular will be closely monitoring activity with interest, given the recent events regarding Boeing.

Opportunities for PE

With vast levels of capital to deploy and high margins and multiples for ADG targets, the ADG sector has also become increasingly attractive to private equity. Even though private equity avoided the sector in the past, partly due to regulatory restrictions on investing compared to strategic buyers, high growth margins and the U.S. government’s focus on the defense and government services budget have made ADG companies an appealing play. Some, like Veritas and Arlington Capital—which this quarter exited military robotics firm Endeavour to thermal imaging equipment maker FLIR for US$385 million — have become specialized in government services and regulated industries.

"As they continue to come in, grow their portfolio companies, and then sell at strong multiples, I think you'll see more PE companies trying to enter the sector," said Stoick. "ADG targets’ high growth prospects and high margins will continue to attract investors, both old and new."

About Deal Dynamics

In October 2018, Hogan Lovells launched a global cross border M&A tool in partnership with Mergermarket. Deal Dynamics is updated quarterly and combines interactive deal data by markets and sectors with exclusive editorial content to provide insights on cross-border M&A. Additional data, interviews and thought leadership pieces can be found here.

About Hogan Lovells

Hogan Lovells is a leading global legal practice providing business-oriented legal advice and high-quality service across its exceptional breadth of practices to clients around the world. “Hogan Lovells” or the “firm” is an international legal practice that includes Hogan Lovells US LLP and Hogan Lovells International LLP. For more information, see www.hoganlovells.com.


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