Deal values continued to plummet in the global aerospace and defense (A&D) sector, as the total value of large deals with disclosed values of at least $50 million fell sharply in 2009 to the lowest level of the decade, according to the PricewaterhouseCoopers LLP report, Mission control: The 2009 annual and fourth-quarter review of merger and acquisition activity in the global aerospace and defense industry.
The average value of large deals of $50 million or more fell from $519 million in 2008 to $379 million in 2009, a decline of 27 percent. The total value of these large deals dropped 62 percent, from $20.8 billion in 2008 to just $7.9 billion in 2009. As a result, total A&D deal value in 2009 fell to its lowest level for a decade, dropping to $10 billion, a 54 percent decline from 2008, and a 76 percent decrease from the $41.6 billion high of 2007.
“During 2009, most companies were reluctant to engage in large deals due to uncertainty over economic conditions and the future of defense spending, as well as the motivation to preserve capital in a very tight credit market. Toward the end of 2009, we saw some positive economic signs, as well as a loosening of credit, particularly for companies with strong balance sheets, creating more confidence among buyers," said Scott Thompson, U.S. aerospace & defense leader at PricewaterhouseCoopers. “In 2010 I expect a rebound in large deal activity among the large corporate buyers which can leverage their access to capital, while small and strategic will remain the trend for the rest of buyers which will continue to focus on the M&A market as a means to shore up gaps in existing businesses or to enter new markets.”
In addition to deal values, the pace of deals valued at $50 million or more decreased significantly in 2009 compared to the previous year. In 2009, there were 21 announced deals with values of at least $50 million, a 48 percent decline from the 40 deals announced in 2008. After showing sequential improvement in the second and third quarters of 2009, the momentum was not sustained in the last quarter of the year, with the number of A&D deals greater than $50 million dropping from eight in Q3 to just three in Q4 2009.
The proportion of deals announced by financial investors remained low in 2009 relative to strategic investors. Financial investors accounted for approximately 14 percent of deals with values greater than $50 million in 2009, which is in line with that experienced in 2008. Of the 21 deals announced with values greater than $50 million in 2009, only three of these deals involved financial investors.
From a regional perspective, U.S. companies continued to dominate the vast majority of overall deal value in 2009. For deal activity above $50 million, the A&D deals involving U.S. targets and/or acquirers accounted for 84 percent of deal value in 2009, compared to 73 percent in 2008.
Additionally, all three deals greater than $50 million announced in Q4 involved U.S. acquirers and U.S. targets. In the same year-on-year period from 2008 to 2009, the percentage of targets in North America with deal value above $50 million increased from 50 percent to 67 percent. The Asia and Oceania region’s participation in deal volume by target increased from 15 percent to 19 percent, while Europe's (ex-United Kingdom and Eurozone) participation in deals valued at $50 million or more decreased from 8 percent to 5 percent.
Innovative Solutions to Economic Recovery
The fourth-quarter Mission control report includes a special report on innovation and its potential for accelerating the economic recovery in the A&D sector. As the economy recovers, companies hope to shrug off their "hunker down" mentality and find new ways to succeed. The question is: Which A&D companies will be first to get back in the game, and how will they do it?
One of the answers to this question will be around innovation and how well A&D companies optimize acquisitions to create new products. New products are essential to address megatrend issues, such as climate change. Winners will also include those A&D companies that look inward to achieve the efficiencies necessary to cut and sustain costs, improve performance, and compete in an increasingly automated business environment.
As the world emerges from the recession, A&D companies that consistently innovate their products through efficient and close interaction with their customers, while responding to emerging environmental issues, will remain ahead of the curve and be in the best position to succeed.
For information on Mission control and to access the full report, including the special section on innovative solutions for economic recovery, visit: www.pwc.com/us/industrialproducts.