COVID-19 Impact on M&A
Aerospace, Defense and Government Contracting saw its strongest month of 2020 having closed 9 transactions in December 2020. The industry's total transaction volume between March 22 – December 31 is down over 8% (34 transactions total) compared to the same period in 2019 (37 transactions). Strategic buyers drove 25 out of the 34 deals that closed between March 22 – December 31. In comparison, 2019 saw over 56% of transactions (21 transactions) completed by strategic buyers in the same period.
Plane Makers’ Dependency on China Threatened by Comac’s C919
China currently has the world’s largest domestic aviation market emerging from the pandemic with traffic 8% higher than it was a year ago. However, Barclays suggests fewer than 20 deliveries of the A320 in 2023 compared to a recent annual average of 120. The fear is that the narrow-body gap will be filled by the C919, manufactured by Chinese state-owned manufacturer, Comac. Although the C919 unlikely to enter service before late 2021, the Chinese government can sell the airplane at very discounted prices and capture significant market share. The U.S. Department of Commerce has banned subsidiaries of Comac, along with other Chinese companies, which could deal a heavy blow to the C919, but China may retaliate by refusing to unground Boeing’s 737 MAX.1
Lockheed Martin Acquiring Rocket Motor Supplier, Aerojet Rocketdyne
The U.S. defense industry continues its trend of industry consolidation. Lockheed Martin is acquiring Aerojet Rocketdyne, one of the largest rocket and missile propulsion manufacturers, for $4.4 billion. This deal is a vertical integration that may expand Lockheed’s capabilities in the new space economy. However, the government has historically not been favorable for these kinds of acquisitions; in fact, U.S. regulators recently updated their guidelines for vertical mergers to make them more strict. Approval of the merger will ultimately come down to the Biden administration and the Federal Trade Commission.2
Blue Origin Made Eligible to Launch Future Missions Without Crews by NASA
NASA named Blue Origin’s New Glenn rocket as one of its potential launch providers for scientific missions later in the decade. New Glenn, which is receiving development funding from the Pentagon, is in the running for national security launches and has already signed up several commercial-satellite operators as customers. Boeing and Lockheed both agreed to buy Blue Origin engines to help power Blue Origin’s next-generation booster targeting Pentagon contracts. New Glenn is designed to carry up to 45 tons into low-earth orbit, a third more tonnage than SpaceX’s largest rocket, the Falcon Heavy.3
China Arms Industry Ranks Second Behind U.S.
Stockholm International Peace Research Institute (SIPRI) released figures for the top arms countries globally, with the U.S., China, and Russia at the top. Russia has been experiencing a slow rebalance of defense procurement, shifting more resources to ground forces, and decreasing aircraft procurement. China is developing its aerospace and maritime programs while putting less priority on tanks and military vehicles. The top 5 overall arms companies by sales were based in the U.S. and accounted for $166 billion in sales, representing 61% of the combined arms sales of the top 25 companies. There appears to be a trend moving into a new arms-race period as the sector and defense budgets grow.4
Congress Races to Pass $2.3 Trillion Spending Deal, with $696 Billion for the Pentagon
Congress is trying to pass a $2.3 trillion spending deal, allocating $696 billion to the Pentagon for a wide array of military expenditures. Pentagon funding comes out to $627.3 billion with an additional $68.7 billion in wartime overseas contingency operations funding. The bill adds a Virginia-class submarine in its $23.3 billion shipbuilding allotment to build 10 Navy vessels. The bill also funds Army combat vehicles, a long-range hypersonic weapon, mid-range missile development, and their enduring Indirect Fire Protection Capability program. The bill includes $1.4 trillion in regular federal government spending for 2021 and $900 billion in coronavirus relief.5
COVID Keeps Lockheed From Meeting F-35 Delivery Goal in 2020
Lockheed Martin delivered only 123 of the planned 141 F-35 aircraft goal in 2020. The COVID-19 pandemic caused issues to the F-35’s main production line as well as its network of suppliers across the globe. The company did, however, take steps to mitigate the impact of the coronavirus pandemic on its production lines and suppliers, such as accelerating payments to small businesses that build components for the aircraft. Lockheed said that they would incrementally ramp production to its original schedule to avoid increased production costs and create the risk of future delays, rather than surging to meet the 141-jet target.6
Blue Canyon Technologies Announces Completion of Acquisition by Raytheon Technologies
Blue Canyon Technologies, a leading small satellite manufacturer and mission services provider, announced that it has completed its acquisition by Raytheon Technologies on December 21st, 2020. This acquisition allows Blue Canyon to grow its product line and meet customer demand, including small satellite solutions, such as nanosatellites, microsatellites, ESPA-class satellites, and other related technologies. Blue Canyon is currently building more than 90 spacecraft for government, commercial, and academic missions. They will continue to serve its customers under the current business and brand from their Colorado facilities.7
Pentagon Readies for Battle in a 5G Future
The Department of Defense said it would spend $600 million to experiment with 5G technology. This new technology could ensure more robust and secure battlefield communications. China and Russia have invested heavily in the ability to jam military communications, and 5G could allow the U.S. to mitigate their effectiveness. Telecommunications and defense companies are partners in these experiments, including AT&T and defense contractor General Dynamics Corporation.8
Largest Transactions Closed
- Physical Optics Corporation, Inc.
- Mercury Systems, Inc.
- Braxton Science & Technology Group, LLC
- Parsons Government Services, Inc.
- Genesys Aerosystems Group, Inc.
- Moog Inc.
- SpaceQuest Ltd.
- AAC Clyde Space AB
This report represents transaction activity as mergers & acquisitions, consolidations, restructurings and spin-offs. Targets are defined as U.S. Based companies with either foreign or U.S. based buyers. Transaction information provided is based on closed dates only.
EBIT - Earnings Before Interest and Taxes