Market Watch: Head for the border: M&As pick up overseas

Jerry Grossman

The unprecedented, rapid pace of mergers and acquisitions continues in the aerospace and defense and government services sectors. While most of these transactions involve only U.S. companies, there has been a significant increase in cross-border deals.

Most selling companies in these transactions are small to midsize, typically earning annual revenue between $20 million and $250 million. Absent changes in the political arena such as an anti-foreign ownership of defense assets viewpoint, expect these cross-border deals to continue.

A closer look at these international transactions from 2001 to 2004 suggests very broad participation relative to industry segment, buyer and seller domicile and size. And the increase in international deals is in line with the trends in overall deal volume. In the aforementioned sectors, the volume of mergers and acquisitions announcements by year is 152 in 2001, 204 in 2002, 228 in 2003, and 281 in 2004 (to date).

In these same periods, the number of cross-border transactions announced were 30, 31, 40 and 57, respectively. The international transactions, 20 percent of the total in 2001, dropped to about 16 percent in 2002-03 before rising to 20 percent in the trailing 12 months ended October 2004.

In 2004 so far, U.S. companies made 24 cross-border acquisitions, while foreign-headquartered buyers acquired 27 U.S. businesses.

U.S. buyers acquired businesses in 10 countries. Canada had nine acquired companies, and the United Kingdom had six for about 60 percent of the total acquisitions. U.S. buyers preferred companies involved in aviation controls and services, communications, military consumables and sensors.

The United Kingdom (14 companies) and France (four companies) accounted for two-thirds of the U.S. acquisitions by foreign buyers. Acquired U.S. companies were focused predominantly in aviation services, communications and sensors.

Interestingly, both U.S. and foreign buyers sought to enhance their offerings in similar industry segments.

Among the U.S. buyers were General Electric Co., L-3 Communications Inc., Computer Sciences Corp., Science Applications International Corp. and Honeywell International Inc., along with many smaller strategic buyers.

Financial investors also were involved as buyers, including the Carlyle Group LLC, J.F. Lehman and Co. and American Capital Strategies Ltd. Foreign strategic buyers included Smiths Group PLC, by far the most active with four transactions.

A notable foreign buyer in the United Kingdom is Qinetiq Ltd., a research and development entity privatized out of the Ministry of Defense, with investment funding provided by Carlyle Group. Qinetiq has completed two U.S. acquisitions this year, Foster-Miller Inc. and Westar Aerospace and Defense Group Inc., with ongoing interest in growing their presence here.

Pricing in cross-border transactions is trending upward, with sellers in deals during the past 12 months realizing higher valuations per dollar of revenue. Although specific pricing evidence often is not disclosed in these transactions, available data indicate that sellers are realizing 25 percent to 35 percent more in sales price per dollar of revenue today than in the 2001 to 2003 period.

Factors driving increased international activity are about the same as those influencing domestic deal activity: emerging technologies needed to retrofit and upgrade platforms, sustainment and logistics priorities, and military focus on network-centric operations, to name a few. For non-U.S. buyers, it is imperative that they gain and expand their foothold in the U.S market, by far the largest in the world.

Continuation of an active cross-border mergers and acquisitions market seems likely, absent increased resistance from government authorities in the seller's home country.

Jerry Grossman is managing director at Houlihan Lokey Howard & Zukin in McLean, Va. He can be reached at

About the Author

Jerry Grossman is managing director at Houlihan Lokey Howard and Zukin.

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