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The global aerospace and defense (A&D) sector wrapped up 2018 with strong M&A activity, and we believe this momentum will continue into 2019, but with a slight shift in strategy. In 2019, we believe A&D deal activity will more prominently feature large A&D companies focusing on transformation through acquisitions of small to mid-sized companies with specific additive skillsets. Here’s a quick snapshot of Q4 and year-end M&A activity in the A&D sector:
We’ve already started to see an increase in interest and emphasis on digital transformation of warfare capabilities. In 2018, the Electronic Equipment category led deal value with 41% of share, followed by 18% contribution from Software and Security Systems. In Q4, Electronic Equipment represented $21.0 billion of deal value, the highest in the last two years.
Strategic investors showed strong momentum in M&A activity for 2018, accounting for 89% share of deal value and 71% share of volume. In Q4 2018, strategic investors accounted for $24.3 billion of deal value, an increase from $5.2 billion from the previous quarter. North America continued to remain the most active acquirer in 2018 with a 76% share of deal value, followed by Asia and Oceania.
In the past two years, geo-political uncertainties and other factors have contributed to an increase – 20% – in defense spending. Considering the possibility of this trend to continue, we believe bolstering military capabilities with emerging technologies such as hypersonic, artificial intelligence, cybersecurity, anti-submarine warfare, and war simulation will be drivers of M&A activity for next year and beyond.
Some other trends that we’ve seen in 2018 such as 6.5% growth in passenger RPK, aircraft leasing, and cost pressure due to rising competition will help continue to stir up the M&A landscape in 2019 as well. For example, leading aircraft OEMs may increasingly leverage inorganic routes to strengthen offerings, in hopes of increasing service revenue over the next decade. And to mitigate supply chain interruptions, OEMs may opt for backward integration through strategic M&A in order to manage production to keep up with the growing order backlog.
All in all, we believe portfolio shaping and positive macro level trends will remain key drivers behind A&D M&A activity in 2019.
View the full Q4 2018 and year-end A&D deals report here.