Not surprisingly, deal making in the second half of 2020 recovered on the heels of unusually low activity in the year’s first quarter. Uncertainty surrounding COVID-19 and compounded by an election year resulted in heavily depressed volumes and values across the A&D spectrum, most notably in the commercial space. While activity has rebounded in the 3rd and 4th quarters of the year, we believe that the recent resurgence of the pandemic and potential shifts in DoD budget priorities will likely keep transactions in check for the next few quarters.
PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021.
PwC's Deals Sector Leader John Potter discusses the trends driving deals and outlook for 2021. Explore national deals trends
In our view, the outlook for M&A in the sector is mixed. The commercial and defense sub-sectors present two very different narratives. Commercial aerospace has suffered an enormous setback under COVID-19, with passenger traffic down massively in 2020 versus 2019. Industry analysts see the recovery from these levels to be measured in years rather than months. Our view is that this will no doubt translate into depressed transaction volumes, as companies focus on day-to-day operations, fleet rationalization, supply-chain stability and liquidity. While we may see a differentiation between the aftermarket and airframes -- as well as some “forced” deals in the OEM supply chains -- we believe commercial deal-making overall will be weak.
On the defense side, the horizon is brighter. Deal-making has not suffered the setbacks seen in commercial transactions, and the uncertainty around election results has now lifted. Defense budget growth during the Trump administration will likely flatten, but we believe certain areas will drive transaction activity, including cyber, unmanned, space, hypersonics and IT modernization. The impact of COVID-19 on defense players has been far more muted than commercial air, and the natural requirement for key defense programs to continue uninterrupted has been -- and will likely continue to be -- foundational to deal volumes going forward.
“The outlook for M&A in the sector is mixed in our view. There are two very different stories to be told between the commercial and defense sub-sectors.”
Aerospace and Defense Deals Leader, PwC US
Aerospace and Defense Leader, PwC US