A Capstone Partners report shows that mergers and acquisitions in defense electronics, space and command, control, communications, computers, intelligence, surveillance and reconnaissance markets reached over 70 transactions in 2020, exceeding the deal volume recorded in 2017, 2018 and 2019.
The report attributed the year-over-year increase in deal activity to “watershed” transactions in the first quarter of calendar year 2020, including the merger of United Technologies and Raytheon, Leidos’ (NYSE: LDOS) acquisition of Dynetics and BAE Systems’ acquisitions of Collins Aerospace’s military GPS business and Raytheon’s tactical airborne radios.
According to the 2021 Aerospace, Defense, Government and Security Mergers and Acquisitions Update report, M&A activity slowed down in Q2 and Q3 of 2020, but recovered in Q4. Private equity firms accounted for 37 percent of transactions in defense electronics, space and C4ISR sectors, up from 24 percent in 2019.
“M&A activity was hit harder than many sectors with pressures on commercial aerospace, however, defense and technology transactions provided support rebounding by the year end with valuation multiples remaining strong. Acquirers are looking to the future anticipating an increase in air travel and eventual return approaching pre-pandemic commercial aircraft production levels, while having concerns around defense spending in the face of escalating budget deficits,” said Ian Cookson, a managing director at Capstone Partners and lead contributor in the newly released report.
Other notable deals in the defense sector are Lockheed Martin’s (NYSE: LMT) proposed acquisition of Aerojet Rocketdyne (NYSE: AJRD) and the planned purchase of FLIR Systems (NYSE: FLIR) by Teledyne Technologies’ (NYSE: TDY).
The report noted that the maturation of artificial intelligence, swarm technology, hypersonics and other key defense technologies inching closer to the initial operating capability phase is driving many of the major deals in the defense sector. Some prime contractors and private equity firms are eyeing acquisitions in the space domain.
Capstone Partners said it expects to see further acquisitions in C4ISR, unmanned technologies, space and missile systems, among other growth areas, amid a flat defense budget in the next several years.