Survey: 2019 dealmaking to match 2018

Almost half of dealmakers in the aerospace, defense and government services sectors see merger-and-acquisition activity remaining as active in 2019 as it was in 2018.

Those expectations are among the key findings of a survey Tysons, Virginia-based investment bank KippsDeSanto conducted of 222 dealmakers in those markets. That group of respondents breaks out to 122 C-level and other top executives from corporate or strategic buyers, with 77 partners and senior professionals from private equity groups.

Across all sectors, nearly 28 percent expect dealmaking activity to increase by 5 percent or more this year, which was slightly less than respondents’ predictions for the same survey that the bank conducted last year but still indicating optimism about activity levels.

Current partial government shutdown aside: that outlook is fueled by a combination of factors such as defense spending increases in the near-term, overall economic confidence, public valuations and stock pricing, and favorable credit markets and interest rates.

Last year’s survey included the late 2017 tax reform legislation that cut corporate rates as a factor in expectations of robust M&A activity.

Within their own organizations, almost 36 percent of dealmakers said they expect to close about the same number of transactions as last year and 35 percent said they expect to close more deals.

A clear majority of 56 percent see valuations as remaining about the same as last year, up 6 percent from the same finding in the prior survey. And 27 percent see valuations decreasing versus the 3 percent who expected declines last year, a trend partly linked to the overall financial market turmoil in the second half of 2018.

Private equity dealmakers were more likely to predict deal valuation declines this year with 40 percent saying they would fall, with 43 percent expecting valuations to stay about the same. Eighteen percent of corporate respondents predict valuation declines and 64 percent believe they will remain about the same.

In the current market landscape, valuations have led to what some bankers and other market observers see as an imbalance in the supply-demand dynamic for M&A activity. Although largest buyers remain selective as well, and some prospective sellers are also choosing to take their time before proceeding on a transaction.

When asked about main M&A goals, nearly 59 percent said adding scale was their third priority, behind gaining critical mass with new customers (83 percent) and bringing in new offerings or technologies (79 percent).

Within the defense market, defense electronics (57.6 percent) and C4ISR (51 percent) came out as the top two priority interest areas for dealmakers. Unmanned systems was next at 34 percent.

Government services sector dealmakers clearly listed cybersecurity and IT modernization as their top two priority areas. And nearly 80 percent of all respondents unsurprisingly said the Defense Department was an end market for which they were very or somewhat likely to seek M&A targets.