Cash-rich defense companies are positioned to make deals
By
Nick Wakeman
Large defense companies have access to more than $40 billion in cash and debt that they can use to replace revenue lost to budget cuts.
Despite proposed cuts to several lucrative military projects, large defense contractors are well positioned to survive and even thrive as the Obama administration shifts the government’s priorities to new areas.
According to an analysis by the investment bank Houlihan Lokey, large defense contractors such as Lockheed Martin, Boeing, General Dynamics, Northrop Grumman and Raytheon have enough cash and access to debt to make $41.5 billion in acquisitions.
That is compared to pure-play publicly traded government services companies that have about $2.1 billion at their disposal.
“The large primes are best positioned to change themselves," said Anita Antenucci, managing director of Houlihan’s aerospace, defense and government group.
Her comments were part of the firm’s annual “Market to Market” seminar.
With access to that much capital, or “dry powder” as she called it, the companies can make acquisitions to replace revenue lost because of budget cuts, she said.
The companies can use acquisitions to move into faster-growing areas such as health care, cybersecurity and energy that are high priorities for Obama administration, Antenucci said.
Despite their strong position as buyers, overall merger and acquisition activity has been dropping. In the first quarter of 2009, there were only 11 announced deals, compared to 24 in the first quarter of 2008.
Since the first quarter of 2008, the number of deals announced each quarter has dropped. Along with the drop in volume there has been a drop in the value of the deals as well, according to Houlihan Lokey’s analysis.