Global defense and aerospace M&A deals doubled in 2010

According to PwC, deals in defense and aerospace were at three-year high, with 17 deals in the fourth quarter totaling over $4 billion in value.

Merger and acquisition (M&A) deal activity in the aerospace and defense (A&D) sector in 2010 bounced back from the 2009 low in deal value, according to the PwC Global report.

Total deal value in the sector rose from $10.9 billion in 2009 to $20.2 billion in 2010, nearly doubling year-over-year. Deal volume remained steady, rising 4 percent from 2009 to 308 announced deals in 2010, the highest annual total in more than 10 years.

In the fourth quarter of 2010, there were 17 announced deals over $50 million, representing the highest quarterly total during the past three years. Additionally, four mega-deals, over $1 billion, were announced in 2010, compared with two in 2009. However, recovery in deal value has been more uneven. The total value of deals over $50 million announced during Q4, $4.2 billion, was the lowest quarterly total of the year yet still easily surpassed quarterly total deal values from 2009.

"We have seen a return of larger deals, a continuation of high deal volume and a significant increase in average deal value in 2010, which meets our previous expectations," said Scott Thompson, U.S. aerospace and defense expert.

Financial investor involvement in the sector, as measured by deal volume, declined in the fourth quarter, accounting for 12 percent of deal volume, but increased for the year overall with 17 percent of deals in 2010.

In total, there were five completed private equity acquisitions with disclosed values over $50 million during the year, and private equity deals accounted for half of the total value of the top ten A&D deals of 2010. Conditions that support financial investment are improving, including reductions in risk premiums, and, because of this, financial investor participation is expected to at least approach longer-term historical levels in 2011.

Cross-border deals as a part of total A&D M&A activity maintained a similar level in 2010 compared with 2009, accounting for 27.8 percent and 28.1 percent of deal volume, respectively. Companies in North America accounted for nearly two-thirds of both the acquirers (67 percent) and targets (65 percent) in 2010 in terms of deal volume (deals worth $50 million or more) compared to 53 percent of acquirers and 53 percent of targets in 2009.

Asian companies represented a quarter of targets and acquirers in 2009 but only accounted for 15 percent in 2010. While there has not been much activity in Asia in terms of deals with disclosed values of at least $50 million, there has been a considerable amount of commercial aerospace deal activity for undisclosed values happening in this region.

Though the relative level of cross-border acquisitions increased slightly in Q4 2010, the level of cross-border acquisitions for U.S. targets declined. This is somewhat surprising because, despite substantial defense budget pressure, the U.S. market still accounts for roughly half of global defense spending, a factor which should continue to attract foreign players to U.S. targets.

"We believe that the overall level of aerospace and defense M&A activity will continue to grow for a number of reasons," said Thompson. "The deal market in the A&D sector may not be firing on all cylinders yet, but key factors are in place to support its recovery."

Future growth

In view of the emerging needs in the Middle East and Asia, an expansion in the market, especially in India, Mexico, and Turkey, as well as China, will give impetus for commercial aerospace, said the report.

As military alliances evolve and create opportunities for North American and European companies outside their home markets, defense exports from Western Europe and North America have increased dramatically to Saudi Arabia, the United Arab Emirates, Turkey, Pakistan, Singapore, the Baltic States, Qatar, Malaysia, and Japan.