Mergers and Acquisitions in Aerospace and Defense Market - Growth, Trends, COVID-19 Impact, and Forecasts (2022 - 2027)

Mergers and Acquisitions in Aerospace and Defense Market - Growth, Trends, COVID-19 Impact, and Forecasts (2022 - 2027)

The mergers and acquisitions in the aerospace and defense market are projected to register a CAGR of over 3% during the forecast period (2022 - 2027).

The COVID-19 pandemic has resulted in a global supply chain disruption, which has had a multifold impact on the aerospace and defense industry. Historically, the defense industry was insulated from international shocks because states tended to rely on domestic producers for critical military equipment. The diversified supply chain, which enabled the defense sector companies to act as system integrators rather than industrial producers, has now resulted in increased transactional costs due to protectionism. Some major disruptions have also altered the production of several military equipments, while in some cases, the imposed trade sanctions have made it impossible for producers to maintain relationships with suppliers, especially with respect to high-technology goods.

However, some of the defense contractors are better positioned since they will not feel the impact of COVID-19 in the short- to mid-term. While production may slow down for the same reasons as in aircraft manufacturing, demand over the next two years is unlikely to be affected since budgets for these projects had been allocated prior to the pandemic, and the projects are critical to national defense.

Mergers and acquisitions (M&A) in the aerospace and defense (A&D) sectors have emerged as a commercially viable business strategy as they help the participants enhance their technological know-how while dividing the risks associated with technological disruptions. An M&A facilitates the sustenance of both firms, and in most cases, helps the major players to foster comparatively faster growth than their competitors. M&A are not necessarily limited to the same sector and there are instances of such collaborations even in cross-sectors by firms to diversify and enhance their technological capabilities to effectively serve the specific requirements of a broader clientele. However, the acquisition of another firm comes with associated drawbacks. A reckless decision and acquisition of a firm with huge debts can result in future losses for the acquiring company. Also, regulations associated with M&A can prove to be a challenge during such transactions, as these transactions have a severe effect on a country’s economy, and most M&As involving dominant A&D firms require the approval of the country's legislature to be completed.

Key Market TrendsCOVID-19 Pandemic Had a Negative Impact Initially in 2020

The A&D sector is highly capital intensive due to the rigorous R&D programs that need to be undertaken to upgrade the product portfolio and integrate new merging technologies in the products, with an aim to compete with other companies offering similar or better products at a given price point. The high risks involved with R&D and supply chain render a certain uniqueness to the sector and elevate the barriers of entry for new players. The COVID-19 pandemic dealt a significant blow to the M&A activity of the Aerospace and Defense market when the pandemic became a global concern at the beginning of 2020. Major multi-billion dollar deals were put off suddenly because large companies entering M&A deals were willing to retain cash to navigate the uncertain economic conditions of the market due to the pandemic. For instance, M&A deals in the United States fell by more than 50% in 2020 as compared to 2019. The Boeing Company, in April 2020 announced the termination of its Master Transaction Agreement (MTA) with Embraer, canceling a joint venture in commercial aviation, leading to a major fallout of a growth opportunity for the market.

The M&As in the defense sector are primarily directed toward acquiring smaller players with niche capabilities to utilize the acquired expertise to upgrade the current product portfolio of the acquiring company. It has been observed that the likelihood of a defense merger is radically increased if it involves smaller players or those focused on tangential industries, as in the case of the United Technologies-Raytheon merger. Most defense incumbents have adopted a “one-stop-shop” model that enables them to develop manufacturing capabilities at the component level, reducing/eliminating the supplier dependence of the OEMs.

However, post the pandemic and the supply chain constrictions that resulted due to the pandemic have driven the market towards multiple mergers and acquisitions to stay afloat in the coming years and cater to the various market needs. The aerospace and defense sector is undergoing a strategic transformation that emphasizes the consolidation of the supplier base to remove unnecessary costs and enhance the long-term viability of each successor organization. In March 2021, Lockheed Martin announced the acquisition of Aerojet Rocketdyne in a deal worth USD 4.4 Billion. The acquisition by Lockheed was aimed at developing better Hypersonic missile propulsion technologies for its defense businesses and further cementing its position as a market leader in the defense industry. With the market reaching a saturation point in terms of technological advancement, multiple other acquisitions are expected to occur, resulting in the creation of newer technological domains and market growth opportunities during the forecast period.

The United States Experienced Major M&A Transactions between 2018 and 2021

The A&D sector in the United States is mature and fragmented, with several global and regional players active in the market. Since the major aerospace OEMs are based in the United States, several tier suppliers are opting to enter or penetrate the US market through M&A. Also, some of the existing companies are acquiring other firms based in this region to increase their offerings. The multi-billion merger between Raytheon Company and UTC that was completed in April 2020 has been envisioned to benefit both firms due to the potential synergies, such as a possible combination of UTC's Pratt & Whitney F-35 JSF engines with Raytheon’s Patriot missile-defense products and expertise in areas such as radars, munitions, and cybersecurity. Likewise, similar other investments took place in the market with respect to defense training and mission-critical technologies between multiple companies to better position themselves to cater to the market demand.

For instance, in December 2021, Vertex Aerospace, a global provider of solutions for aftermarket aerospace services, completed the acquisition of Raytheon Technologies' Defense Training and Mission Critical Solutions business. This transaction is expected to expand Vertex's value-added technology solutions and services, including defense and commercial training.

With multiple other similar acquisitions aimed at better catering to the market needs, the United States is expected to witness further healthier growth in the general Mergers and Acquisitions (M&A) activity during the forecast period.

Competitive Landscape

The A&D sector comprises several players, and the market is highly competitive. Companies are adopting aggressive acquisition strategies to gain major contracts to increase their market presence and dominance. A diversified growth strategy protects a firm from country-specific economic slumps. This has triggered the acquisition of several competitor product portfolios by industry incumbents to gain a competitive advantage in the market. The most notable of such horizontal portfolio expansions is that of BAE Systems PLC, which in May 2020, completed the acquisition of the Military Global Positioning System (GPS) business of Raytheon Technologies Corporation. The acquisition presents an opportunity to acquire a high-quality, technology-based business that augments the existing BAE Systems' Electronic Systems portfolio through the addition of world-class GPS anti-jamming and anti-spoofing technology. Several other M&A transactions were expected to be completed by the end of FY2020, resulting in substantial consolidation of the market.

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