Cash-rich defense companies are positioned to make deals

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.


About the Author

Nick Wakeman is the editor-in-chief of Washington Technology. Follow him on Twitter: @nick_wakeman.

Reader Comments

Fri, Apr 24, 2009

Another point is that valuations of many defense company's are down because of the broader economic down turn. The combination of deep pockets and low valuations makes for a perfect storm of M&A activity. I wouldn't be surprised to see a blockbuster acquisition soon that ignites the sector.

Wed, Apr 22, 2009 Editor

My understanding is that it will be in areas such as cyber security, health care, energy. The areas that are priorities for the Obama administration.

Wed, Apr 22, 2009 Puregoldj Washington, DC

Any ideas what companies could be targets? Anything even on what sectors or subsectors (more than the "can use acquisitions to move into faster-growing areas...)? I am guessing we could see something outside defense, though probably more in the "dual-use" category.

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