Divestitures Drive Global Aerospace & Defense M&A Activity in the Second Quarter of 2011, According to PwC

NEW YORK, Aug. 11, 2011 /PRNewswire/ -- Merger and acquisition (M&A) activity in the aerospace and defense (A&D) sector was driven by an increase in divestitures and a greater proportion of deals being announced by U.S. dealmakers in the second quarter of 2011, according to Mission Control, a quarterly analysis of M&A activity in the global aerospace and defense sector by PwC US. While the pace of deal activity in the second quarter is consistent with the level of activity throughout 2010, PwC expects a very strong second half of the year for M&A in the aerospace and defense industry.

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In the second quarter of 2011, there were 13 deals (worth $50 million or more) totaling $5.3 billion, compared to the same number of deals in the second quarter of 2010 that had a value of $5.2 billion. While average deal value was also in-line at $400 million in the second quarter, both deal volume and value were up in the first six months of 2011 compared to the same period of 2010. For the first half of 2011, there were 30 deals with a total value of $15.2 billion, a 39 percent increase in value when compared to the 23 deals with a total value of $10.9 billion in the first six months of 2010.

"Deal activity during the second quarter declined somewhat from the first quarter of 2011, but this appears to be more of a result of the robust nature of M&A activity during the first quarter than the start of a long-term trend," said Scott Thompson, U.S. aerospace and defense leader at PwC. "In fact, the increases in the first half of this year compared to last year demonstrate an ongoing appetite for deals in the sector. We're already seeing signs of significant deal flow in the second half that could lead full year 2011 totals to approach the record levels of 2007. Defense companies continuing to reshape their portfolios, ongoing appetite from investors in the booming commercial aerospace sector and the growing stockpiles of cash on corporate balance sheets are all factors contributing to our M&A growth expectations in aerospace and defense."

In the second quarter of 2011, 62 percent of total deal activity was driven by divestitures. Divestitures also drove an increase in financial investor activity in the second quarter, accounting for eight deals or 15 percent of deal volume for deals worth $50 million or more. This compares with one deal valued at $900 million in the same period last year and one deal valued at $200 million in the first quarter of 2011. Leveraged buyouts accounted for 8 percent of total deal volume for deals worth $50 million or more, the same percentage as the second quarter of 2010. According to PwC, divestitures are expected to grow as investors are likely to continue to push for spin-offs of slower growth defense businesses, which provides opportunities for financial investors, as well as companies, focusing their business portfolios on a smaller set of defense spending priorities.

"Recently, shareholders in the aerospace and defense sector have focused on defense service targets, but it's noteworthy to point out that these parties also played a significant role in advocating for major changes to conglomerates with defense businesses," added Thompson. "Financial investors should continue to find attractive investment opportunities as sector constituents continue to seek to shed certain defense assets, which tend to have relatively stable cash flows from longer-term government contracts."

Deals worth more than $50 million involving U.S. parties accounted for nine out of 13 deals, representing 69 percent of total deal volume during the second quarter of 2011, compared to 77 percent in the second quarter of 2010 and 47 percent in the first quarter of 2011.

PwC's Thompson continued, "Strategic investors, especially in the U.S., are continuing to move quickly in this space, leveraging their ample liquidity positions. Weak defense spending trends coupled with pressures to use this cash or return it to shareholders should lead to these companies seeking more M&A opportunities. While strategic investors are narrowing their focus on businesses that are believed to be more resilient to defense spending cuts, they are also shifting from diversified strategies toward building competencies in specific defense niches, which could drive additional mega deals."

Although only one mega deal – defined as deals worth $1 billion or more – was announced in the second quarter of 2011, three mega deals were announced thus far in 2011 with a combined value of $8.6 billion, already surpassing full year 2010 mega deal value of $6 billion.

In the second quarter of 2011, there were six cross-border deals worth $50 million or more, compared to five cross-border deals in the second quarter of 2010. That helped drive the volume of cross-border deals that occurred during the first half of this year to already reach 13 compared to 14 for the full year 2010. According to PwC, during the first half of 2011, cross-border deals were mostly driven by acquirers from developed economies while the majority of deals announced this year by acquirers from emerging and developing countries involved companies in Brazil, Russia, India and China (BRIC) consolidating their local commercial aerospace industries.

"Several of these cross-border deals targeted U.S. defense companies and despite pressures on U.S. defense spending, the overall size of this market will continue to attract foreign buyers," continued PwC's Thompson. "However, as more aerospace and defense companies are pursuing deals involving multinational targets, joint ventures, or supply chains, they need to be cautious in countries with higher corruption."

According to PwC, while deal activity will continue to increase this year, companies across the sector are paying careful attention to the issues like corruption. As anti-corruption initiatives are intensifying with governmental bodies and regulatory agencies prioritizing the issue, aerospace and defense companies must enhance their corruption due diligence programs to make sure they fully understand the risks of acquiring certain targets.

U.S. enforcement agencies have greatly expanded their prosecution of Foreign Corrupt Practices Act (FCPA) violations in the last year. According to PwC, the aerospace and defense industry is at increased risk for enforcement actions due to the nature of the industry itself and because companies must often deal directly or indirectly with the governmental and quasi-government agencies.

According to PwC's Thompson, "The aerospace and defense industry has always viewed corruption as a significant concern, and with the uptake in cross-border deals, companies are looking to mitigate the related risks. Through focused anticorruption efforts, these companies have the opportunity to balance compliance and risk with growth to produce the best outcomes for their M&A strategies."

In the latest Mission Control, PwC includes a special report entitled, "Does your company's M&A strategy mitigate corruption-related risk and cost?" that discusses the factors that companies need to consider when pursuing cross-border deals including vetting third parties, determining the appropriate level of due diligence, and navigating disclosure requirements for certain resources like conflict minerals.

For a copy of Mission Control, PwC's quarterly analysis of M&A activity in the global aerospace and defense sector, please visit: www.pwc.com/us/industrialproducts.

About PwC's Global Aerospace & Defense Practice

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. This Aerospace & Defense expertise and experience is enhanced by that of our Public Services practice with professionals focused on assisting federal, state, and local governments, international agencies, and healthcare entities.

About PwC's Industrial Products practice

PwC's Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. With more than 31,000 professionals located in over 150 countries, PwC's IP global professionals deliver a wide range of industry-focused tax, assurance, and advisory services to address critical business issues. For more information please visit: www.pwc.com/us/en/industrial-products

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PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.

© 2011 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

SOURCE PwC