Year 2021 is likely to prove a turning point for the global Aerospace and Defense (A&D) industry in ways that will have significant implications for corporate dealmakers for years to come. Three major trends — geopolitics, the pandemic and digital transformation — have become powerfully intertwined. These factors are likely to lead to the restructuring of the A&D industry that will create opportunities and risks for A&D companies and financial sponsors looking for M&A.
This report begins by examining the three drivers of M&A in A&D, and then delves into the effects they will have on corporate deal making over the next several years. These three trends may lead to a range of outcomes for A&D over the next 3 years, ranging from reshaped product portfolios and divestments to increased M&A as well as greater involvement of private equity.
Despite the uncertainty, however, there appears to be early signs in the M&A market of the recovery that is expected to begin in 2021. In the final two months of 2020, there was a surge of deal activity in the A&D sector, accompanied by reports of multiple bidders for certain companies and a growing number of offers for others.
The challenge is that, in several countries, the A&D industry has a ‘hollow middle’: a few large primary contractors, many small companies with annual revenues under US$100 million, and little in between.
Consolidation is not the only trend that is likely. Some companies will try to reduce their reliance on commercial aviation by means of M&A. Aerospace companies with feet in both camps, civilian and military, will be relying on their business in the latter sector to help them through the next few lean years. Some will want to diversify further and acquire more defense-manufacturing assets to increase their exposure to the military market.
With mounting federal debt levels and the extended period of depressed commercial air travel, there is likely to be a significant number of small and midmarket deals in the tier II and III segments.
Principal – Deal Advisory, Aerospace and Defense Sector Leader
KPMG in the U.S.
There is a view that civilian aerospace M&A in France has touched bottom and that there will be a wave of industry consolidation in the trough. At the moment, however, every aerospace manufacturer in France sees itself as a buyer.
Global Head of Industrial Manufacturing
KPMG in France
In Australia, companies that have spread their activities across aerospace, defense, space and emergency services are highly regarded by Australians and can expect to hire people from among the best and brightest.
Partner in Charge, Operations Advisory
In India, the largest opportunity would be if the entire supply chain for a particular product were to move there. That would be the biggest game changer. The biggest risk would be to sit on the sidelines and not make an investment.
Partner and Leader, Aerospace and Defence
KPMG in India
I expect the market for crossborder deals in A&D will be extremely large and that technology advances will bring in new players to the sector that extends to space defense.
Head of Aerospace and Defence
KPMG in the UK
Lockdowns, travel restrictions and the protective measures taken to the containment of the coronavirus led the European airline industry into an unprecedented crisis. This not only had an impact on numerous employees at large aircraft manufacturers, but also on the predominantly medium-sized suppliers – in particular in Germany.
Partner, Head of Branch Office Nuremberg, Audit
KPMG AG Wirtschaftsprüfungsgesellschaft
The UK aerospace supply chain remains highly fragmented and in light of the structural changes arising from COVID, there is clear need for consolidation to give the supply chain the resilience and scale of production capability, engineering, management and financing that is needed for the UK supply chain to be competitive on the global stage. The challenge to this remains identifying the consolidators, private equity or existing suppliers, and those willing to make the long term investments required.
Partner Lead, Aerospace
KPMG in the UK
This report provides an overview on how the next 3 years are likely to prove a turning point in the development of the market for M&A in A&D, as the long-term effects of geopolitical shifts, the global pandemic and digital transformation create opportunities and challenges for dealmakers and companies in the sector. As the market evolves, executives will need to consider the following strategies if they are to improve shareholder returns:
Companies that move quickly and decisively are likely to be rewarded as the M&A market heats up. This does not mean that executives need to cut corners; quite the opposite. The A&D industry will continue to be governed by policies to protect domestic manufacturers, which means that companies must be extremely prudent and politically savvy. But geopolitics and technological rivalry is changing the game. Governments are focusing on protecting their key sectors from potentially hostile industrial predators and, at the same time, are becoming more open-minded about cross-border industrial collaboration. This environment will provide a fertile ground for M&A opportunities in A&D for those companies that are careful, yet bold.
Align investment plans to the rapidly evolving business cases, as they arise. This means paying close attention to the impact and timing of shifts in demand for military equipment, changes in regulatory environment, technology advances, mission priorities, defense budgets and the long-term impact of remote working.
Deploy advanced analytical techniques to evaluate businesses and identify corporate opportunities. Traditional synergies may no longer fit the bill. Run a multitude of scenarios and analyze a wide and diverse array of information.
Use flexible valuation models to compare a wide range of sensitivities and retest fundamental assumptions that drove value in the past but are unlikely to hold true any longer.
Explore innovative deal structures including option-based, seller notes, contingent or deferred consideration or loan-to-own arrangements.