Global Aerospace & Defense Deal Value and Volume Jump in the First Quarter of 2011, According to PwC

NEW YORK, May 5, 2011 /PRNewswire/ -- The pace of merger and acquisition (M&A) activity in the aerospace and defense (A&D) sector increased significantly this quarter compared to 2009 and 2010 levels, and will likely continue due to competition in commercial aerospace, budget headwinds in defense spending, and availability of capital, according to the first quarter 2011 edition of Mission control, PwC's quarterly analysis of M&A activity in the global A&D sector.

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In the first quarter of 2011, deals with value greater than $50 million amounted to $9.5 billion with a total of 17 deals compared with 10 deals and $5.7 billion in the same period of 2010 – this represents an increase of approximately 67 percent in deal value and 70 percent in deal volume over the same period in 2010.  A primary contributor to the first quarter's value was the uptick in mega and large deals. There were six transactions valued over $250 million in the first quarter of 2011, which also helped drive the increase in average deal value to $558 million – surpassing the average deal value of $357 million for all of 2010.

The impact of dealmakers outside the U.S. played a key role in the strength of the first quarter's activity. When excluding transactions involving U.S. targets and/or acquirers, the value of deals totaled $5.7 billion, or approximately 60 percent of the first quarter's total value, and over half of the quarter's volume. According to PwC, the relative participation of U.S. entities is likely to return closer to the levels of the previous two years when U.S. entities were involved in the majority of deals in both volume and value.

"The total number of deals announced in the first three months of this year, regardless of whether a value was disclosed, is the highest first quarter total for the global A&D sector in at least 30 years, contributing to our positive outlook for M&A in 2011," said Scott Thompson, U.S. aerospace and defense leader at PwC.  "The substantial pick up in deal activity is being motivated by a range of factors and a variety of deal strategies, especially when it comes to the larger transactions in the quarter. We expect this increased pace to continue and to be largely driven by portfolio reshaping among defense contractors and a robust commercial aerospace market, supported by strong liquidity and improving capital markets."

For the three month period ending March 31, 2011, A&D deal valuations declined to 1.2x revenue compared with 1.7x in 2010 and 1.4x in 2009.  According to PwC, overall valuations will likely increase over the balance of 2011 as the A&D M&A environment improves.  However, there will be downward pressure on defense valuations due to budget constraints, while aerospace multiples should rise.

In the first quarter, financial investor deals worth more than $50 million represented 17.6 percent of total deal volume, compared to nearly 40 percent in the same period last year, and 15.5 percent of all deals in 2010.

"Financial investor activity is likely to continue increasing as private equity firms look to capitalize on portfolio reshaping and put their capital to work in relatively mature, but high cash flow, companies.  In addition, private equity firms will continue to find opportunities to purchase smaller A&D services companies," continued PwC's Thompson.  

There were seven cross-border transactions with values greater than $50 million in the quarter, totaling $1.9 billion.  The regional distribution of deals in the first quarter showed European acquirers becoming more active, accounting for four of the six 'mega' and large deal announcements, two of which were outbound deals.  According to PwC, while cross-border deals from China that yield access to new technologies will remain a staple in future M&A activity, China will also remain very active in consolidating and building out its domestic commercial aerospace industry.

"It seems unlikely that cross-border deals will increase much beyond the current levels, but we do expect much of the cross-border interest to involve global competitors looking to enter the U.S. market," added PwC's Thompson.  "As global aerospace and defense M&A activity increases, companies are going to continue to be challenged when it comes to successfully integrating businesses, operations and human resources.  By seeking to properly understand, address and resolve key concerns around these issues during the due diligence stage, companies can have a major positive impact on the success of the deal and the business going forward."

For a copy of Mission control, PwC's quarterly analysis of M&A activity in the global A&D sector.

please visit: www.pwc.com/us/industrialproducts

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© 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. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

SOURCE PwC