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Aerospace and defense: Deals 2022 outlook

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What's driving deals in 2022

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for 2022.

Emerging technologies, geopolitical and regulatory trends likely to drive 2022 M&A activity   

After a record first quarter, M&A activity in the aerospace and defense (A&D) sector jetted on with strong activity throughout 2021  rebounding from lower levels in 2020. The activity has been driven in part by the Biden 2022 budget, which maintained total defense spending largely intact. The 2022 budget, along with renewed geopolitical tensions and an emphasis on innovative technologies are expected to keep M&A activity healthy in the medium to long term.

The commercial aviation sector, still impacted by the effects of the COVID-19 pandemic, is starting to display signs of recovery as air travel in major markets returns to near pre-pandemic levels. Strong M&A activity in 2022 in the commercial aerospace sector appears likely, given that some manufacturers are raising production forecasts and that there exists a potential for supply-chain consolidation.

Aerospace and defense deals outlook

Global defense spending increased in 2021, led by growing geopolitical competition. This, along with a realignment of US defense priorities surrounding R&D-led technology innovations, is expected to steer defense M&A activity in 2022 and beyond. We expect defense-focused corporates to continue evaluating existing portfolios and divest non-core assets, while also focusing M&A activity to invest in emerging technologies through the acquisition of innovative startups.

The commercial aerospace sector will most likely continue to be dependent on the post-pandemic recovery and the impact of future virus variants. Vaccination rates will likely dictate the timing of a return to pre-2020 M&A levels. Despite some positive tailwinds, commercial aviation supply-chain capacity still remains well in excess of demand. Consolidation in this sector will likely be driven by well-capitalized suppliers and private equity firms.        

Key deal drivers

The nature of capital

We expect financial sponsors to continue viewing A&D companies as attractive capital destinations, particularly companies that provide an opportunity for supply-chain rationalization. In addition, private equity firms will likely seek out service businesses in areas such as autonomous systems, hypersonics and other growth areas.

Special purpose acquisition company (SPAC) activity will likely continue in 2022 as investors remain interested in emerging and innovative technologies, such as space. Commercialization of the space sector offers growth opportunities, attracting strategic, private equity and SPAC investors.

Geopolitical and regulatory shifts

As geopolitical tensions persist, we expect an increase in military budgets and spending. This could lead to governments limiting foreign investment in certain sectors, which, in turn, could limit M&A activity and cross-border transactions. This may further drive investment in various growth technologies.

Optimizing portfolios and divesting to reinvest

Companies in the sector are motivated to evaluate their portfolios and make strategic moves to unlock value by divesting non-core assets —  including large assets and businesses. We expect a continued rebalancing of portfolios, partnering with technology companies and smaller players to acquire digital capabilities. Consolidation opportunities could also open opportunities as lower-tier suppliers faced with a protracted recovery and working capital needs may seek outside capital. 

“In 2022, M&A activity in the defense sector will most likely continue to be driven by geopolitical factors, emerging technologies and budget priorities — including positioning ahead of upcoming elections later in the year. M&A in commercial aviation will be closely tied to the recovery from the pandemic and supply chain stability — either to drive growth through technologies or to consolidate during a slower recovery.”

— Bob Long, US Aerospace and Defense Deals Leader

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Bob Long

Aerospace and Defense Deals Leader, PwC US

John M. May

Partner, PwC US

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