M&A

Aerospace Tech Sector Booms

Aerospace and defense M&A is on the rise, but CFOs like L-3 Communications's Michael Strianese say it is information technology, not just the airpl...
Roy HarrisMay 10, 2006

Since Boeing Co. announced its $1.7 billion acquisition of Aviall Inc. on May 1, most attention has focused on the global airliner business, where Aviall does most of its aviation parts and services work, and where Boeing’s booming 787 Dreamliner program has been in the spotlight.

But across the aerospace and defense sector, more M&A activity is stirring on the defense side, and especially in information technology and services. That area is hardly a small element of Aviall, where defense will account for 40 percent of total 2006 revenue of $1.6 billion.

Some executives in the industry are expecting a series of deals at around the $300-million level, and perhaps larger, as defense companies build up their IT and services operations, and adjust to a defense environment that continues to change to meet anti-terrorist and homeland security needs.

“For the market overall, the IT area has been the most active,” says Paul Nisbet, an aerospace and defense analyst with JSA Research Inc. in Newport, R.I. Nisbet notes that since L-3 Communications paid $2.65 billion last July for Titan Corp., which provides technical support for national security operations, there have been a number of other defense IT and services deals. “General Dynamics, Northrop and Lockheed have all been active in the IT area,” he says.

One of the largest was General Dynamics Corp.’s December acquisition of Anteon International Corp., a systems-integration and IT support company, for $2.2 billion.

“We’ve seen in 2005, and continue to see in 2006, a product-rich environment for M&A in the $300-million area,” says Michael Strianese, CFO of L-3 Communications. “We’ve already planned to grow more, vertically or horizontally,” he says, noting that in addition to Titan, L-3 did 11 much-smaller deals in the last year.

He expects some industry deal activity shortly in the global positioning and navigation areas. “It’s pretty well rumored that Northrop will be bringing products to market over the next couple of months,” the CFO says.

A spokesman for Northrop Grumman says the company doesn’t comment on possible M&A activity or sale of operations.

As defense CFOs look at “the geopolitical situation in Iraq, Iran, North Korea, China and Afghanistan,” according to Strianese, “there is more demand on military assets in the intelligence, surveillance and reconnaissance field.” That has created interest in M&A, in his view.

The success of unmanned aerial vehicles (UAVs) such as Northrop Grumman Corp.’s Global Hawk has also “opened a lot of eyes to how far this UAV technology can go” in warfare, says Strianese.

Among L-3’s areas of interest are electro-optical and infrared technologies and robotics — the last of those being a field of “generally small, privately-owned companies with specialized product areas.” Work in the Middle East disarming roadside bombs, which the industry calls improvised explosive devices, is also drawing more attention from the Defense Department, and thus from the defense industry.

For L-3 in particular, homeland security has been a growth area as the company develops integrated non-invasive security systems to replace today’s manually-intensive airport security technologies, Strianese says. New systems allow additional capabilities like detecting plastic weapons.

“Rather than L-3 spending a lot of money on research and development, we’ve been able to identify these special niche companies that fill the gaps,” he says. “These companies essentially are started by scientists, and they don’t have the resources we have.”

With defense contractors now breaking down into a Big Five of Lockheed Martin Corp., Boeing, Northrop Grumman, General Dynamics and Raytheon Corp., Strianese says the industry calls his company and others its size “super-mezzanine” players.

On the large-deal front, executives believe that potential government opposition would prevent further consolidation within the Big Five. But Strianese acknowledges that his own company “probably would fit with any one of them without a lot of government pushback.” For the most part, L-3 was assembled from acquisitions of units that the larger contractors sold off.

Don’t be surprised if Boeing, too, expands its defense businesses by acquisition this year.

Even though Reuters headlined a May 3 article “Boeing Chief Bets on Internal Growth,” company CEO Jim McNerney, speaking in Paris, actually noted both the civil aircraft and defense markets when he said: “Look for us to accelerate in adjacent spaces with medium- and small-sized acquisitions.”

At the same time, he called Boeing’s internal growth “my first priority.”

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