Modeling, Simulation & Training: Accelerated Middle Market M&A Activity in Anticipation of a Different Future
June 25 , 2007
Financial analysts are claiming valuations of aerospace & defense (A&D) companies are at record highs, yet mergers and acquisitions exceeded $33 billion in 2006 – a level reminiscent of the late 1990’s consolidation era. While the largest transactions occurred in Europe (e.g., the $3.5B Civen/Avio and the $3.2B EADS/Airbus acquisitions), the accelerated pace of deal activity closer to home, meaning Central Florida, in the modeling, simulation and training (MS&T) community is equally dynamic.
A Review of MS&T Transaction Activity
Historically, mergers & acquisitions activity in the MS&T sector was relatively dormant until 9/11, when the rising tide of deal interest by strategic and financial buyers for all things military lifted the MS&T deal boat; however, as the war in Iraq and Afghanistan continued, interest in MS&T companies waned as buyers’ followed the money and shifted attention in 2004 and 2005 to companies whose revenue streams were more directly attuned to Operations & Maintenance (O&M) budgets and equipment recapitalizations to support wartime requirements.
As corporate strategic planners are considering what a post-Iraq landscape might look like, MS&T is back on their radar screens. 2006 was a banner year for middle market MS&T deal activity, with over twenty companies with revenues of $100 million or less being sold. With eleven transactions having taken place during the first four months of this year, we expect 2007 to top 2006.
A Review of MS&T Transaction Prices
Levels of deal pricing has closely correlated to deal activity; as the number of deals taking place has increased so has pricing; in 2007, owners of middle market MS&T companies received a record median 1.8x sales when selling their companies, and prices for MS&T companies continue to trend upward in tandem with an increasingly aggressive deal appetite for companies within this sector.
Middle Market MS&T Acquisitions Per Year
* Notional level assumes 2007 pace continues through December
Middle Market MS&T Median Acquisition Price / Sales Multiple
Drivers of MS&T Deal Activity & Pricing over the Next 12-18 Months
The same drivers of aerospace & defense (A&D) deals in general are also at work in the MS&T sector:
1) A&D companies that are buying MS&T companies are holding record levels of cash as a result of recent years’ high levels of government defense spending.
2) Stock prices of A&D companies are at record highs at precisely a time that the defense community is anticipating increasingly tight defense budgets, for reasons as varied as pressure to reduce government deficits, the eventual draw-down of U.S. military involvement in Iraq, and leadership changes in the White House in 2008. Therefore:
3) The combination of hordes of cash and the performance expectations embedded in strategic buyers’ stock prices will drive an exercise in capital redeployment over the next eighteen months.
Cash on A&D Company Balance Sheets
Dow Jones A&D Index
Implications for MS&T Companies
Strategic buyers will find it increasingly attractive to bolster waning internal growth by buying companies that have strong growth prospects, and MS&T companies will fit that bill. Owners of MS&T companies considering the sale of their company will continue to benefit from strong pricing as buyers have come to appreciate the superior economics for simulators and simulation solutions in anticipation of tighter commercial aviation and government defense budgets (where, for example, the cost of flying an increasingly realistic and networked virtual F-35 or B-787 is a mere fraction of flying the real thing).
In summary, the MS&T market becomes an increasingly attractive investment to buyers anticipating ways to grow in budget-constrained customer environments.
What’s Next?
In the next issue of the PCE Aerospace & Defense Newsletter, we will take a closer look at the current pricing environment and will also explore in more detail the outlook for MS&T deal activity and pricing beyond 2008.
If we can be of assistance in evaluating liquidity strategies and in helping you identify the appropriate timing of a transaction, please call PCE at 621.2100.
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