Rev those M&A engines

It shouldn’t be a surprise that a recently released KPMG survey has aerospace and defense executives eyeing mergers and acquisitions as a vehicle for growth.

In this market, buying other companies is about the only way large defense will experience growth.

The KMPG survey, which was conducted in 2011, found that 72 percent of the defense executives surveyed expect to be a buyer or seller in the next two years. Sixty-two percent said they will be buyers; and 10 percent expected to be sellers.

The results are based on a survey of 100 executives from aerospace and defense companies with more than $100 million in annual revenue. Of that group, 43 percent of the respondents were from companies with more than $10 billion in annual revenue.

As I said, it’s a tough market with little to no organic growth expected. In fact, defense spending should shrink in 2013 and 2014.

But this market downturn is a polar opposite to the last major contraction in the late 1980s and 90s. Back then companies were saddled with debt, and the consolidation of the companies was driven as much by the need to pull costs out of the market and gain economies of scale. The idea then was to buy bulk.

Today, the major defense players are sitting on wads of cash, so debt is not a problem. The buys are much more strategic, which is why you see Lockheed and General Dynamics buying health care related companies, or Boeing buying cybersecurity and unmanned systems capabilities. Often the deals are so small, they aren’t required to report the value of the transaction.

The strategy is to acquire capabilities in the growing segments of the market. The deals aren’t focused on adding bulk but about positioning for growth.

While M&A transactions will be active, don’t expect a mega-merger between the top tier of Lockheed, Boeing, Northrop Grumman, General Dynamics and Raytheon. Even if it makes sense strategically, its doubtful government regulators will let any of these companies merge. And if they did, the businesses they would have to shed to comply with anti-trust and organizational conflict of interest regulations would make a deal very unattractive.

But we will see these companies continue to build their portfolios away from the traditional bent metal portion of their businesses.

The reason I like M&A activity is that it is probably one of the best ways to follow what’s hot in the market and what’s not.

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