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Defense M&A activity rode high in 2005
By James. H. Smith
February 03, 2006
With an estimated US$38 billion in worldwide M&A activity in the aerospace
and defense sectors, 2005 was a very good year. And the current year also
looks promising.
That activity has been spurred by record government defense spending,
recovery in the commercial aerospace market and a move by governments from
weapons and hardware spending to the high-technology sector.
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Governments have placed a high priority going forward on intelligence,
surveillance, reconnaissance, UAVs and communications in transforming the
military.
While industry watchers have noted the increased popularity of stock
buybacks and dividend payments, M&A activity continued to be the strategic
weapon of choice for companies wanting to move decisively into desirable
market niches.
Top acquirers used M&A activity to drive their top lines far past the levels
achievable through organic growth alone. And increasing numbers of private
equity buyers saw strong cashflows and dependable revenues in the aerospace
and defense markets.
There are currently about US$9 billion of M&A deals in the pipeline.
One of the major deals in the pipeline is reaching the finish line as
shareholders of DRS Technologies approved the US$2 billion acquisition of
Engineered Support Systems.
The deal is expected to be finalized next month.
That the trend continues into 2006 is evidenced by the very acquisitive
activities of L-3 Communications.
L-3 Communications, a major high-technology contractor to the US Department
of Defense and the Department of Homeland Security, started out the new year
with three acquisitions, all announced on 31 January.
In 2005, L-3 ranked as the ninth-largest supplier to the Pentagon, landing
US$4.7 billion in government contracts -- twice more than the company booked
in 2004.
For the full calendar year 2005, consolidated sales at L-3 increased by
US$2.55 billion, or 36.9 per cent, to US$9.44 billion from consolidated
sales of US$6.90 billion for the previous year. The increase in consolidated
sales from acquired businesses was US$1.74 billion, or 25.3 per cent,
including US$1.05 billion from the Titan acquisition. Consolidated organic
sales growth was 11.6 per cent, or US$803.3 million.
The New York-based company completed the acquisition of SAM Electronics GmbH
for approximately US$150 million in cash. The acquired business, renamed L-3
SAM Electronics GmbH (L-3 SAM), is expected to add approximately US$290
million to L-3's sales for 2006 and be slightly accretive to L-3's earnings.
Headquartered in Hamburg, Germany, L-3 SAM is a manufacturer and supplier of
maritime electrical and electronic systems to shipyards, shipping companies,
international navies and commercial shipyards.
L-3 SAM's substantial market share in commercial shipbuilding is a major
expansion of L-3's customer base and adds to L-3's communication product
offerings for military and commercial use.
L-3 Communications also acquired Alton (Hampshire) England based Advanced
System Architectures Ltd. (ASA). Price and terms were not disclosed.
The business has been renamed L-3 ASA. It will report to L-3's Integrated
Systems Group and be included in L-3's Command, Control, Communications,
Intelligence, Surveillance and Reconnaissance (C(3)ISR) reportable segment.
The acquisition is expected to add approximately US$10 million to L-3's
sales in 2006
ASA is a niche systems engineering and software developer of multi-sensor
fusion and tracking systems, primarily for challenging targets such as
cruise and ballistic missiles and military aircraft. The company also
develops interoperability communication systems for defense applications, as
well as commercial on-board passenger information, entertainment and IT
systems for air and rail travel.
Additionally, ASA currently supports key US Department of Defense and US
Missile Defense Agency programs, as well as prime contractor initiatives in
the UK and US.
L-3 also announced the acquisition of TCS Design and Management Services.
The terms of the transaction were not disclosed.
The business, which has been renamed L-3 TCS, will report to L-3's
Integrated Systems Group and will be included in L-3's Aircraft
Modernization and Maintenance reportable segment. The acquisition is
expected to add approximately US$45 million to L-3's sales in 2006 and be
slightly accretive to L-3's earnings.
Headquartered in Warner Robbins, GA, TCS specializes in fixed and rotary
wing aircraft and avionics system engineering services for the US Air Force
Special Operations community.
The company provides software development and integration, modification,
testing, documentation, inspection and depot maintenance services to its
customers, which also include prime aerospace contractors and the US Army.
TCS also has a major facility in Fort Walton Beach, Florida.
In other acquisition activity, Virginia-based Management Consulting &
Research LLC, a consulting firm specializing in integrated program
management support for the US Department of Defense and other federal
agencies, has purchased Terradigm Inc, an Albuquerque, New Mexico-based
company providing program and information management services to government
and commercial clients.
Terms of the deal were not disclosed.
MCR has provided services to the Office of the US Secretary of Defense, the
US Air Force, Navy and Marine Corps, the US Missile Defense Agency, the US
Federal Aviation Administration, the US Departments of Energy and
Transportation, and the General Services Administration, as well as major
defense contractors in the US and Europe.
Jim Smith, is a freelance writer and may or may not hold
long or short positions in any of the stocks mentioned in this article and
those positions can change at any moment. InvestorIdeas.com,
Homelanddefensestocks.com (HDS) Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, The opinions and content of
the Defense Market Report are soley that of the freelance writer, Jim Smith.
InvestorIdeas or HDS are not affiliated or compensated by the companies
mentioned in the articles.
Nothing in the articles should be construed as an offer or solicitation or
recommendation to buy or sell any specific products or securities. Past
performance does not guarantee future results.
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