Aerospace and defense: US Deals 2023 midyear outlook

Aerospace and defense deals expected stable for rest of 2023

After some positive signs in the second half of 2022, dealmaking in the aerospace and defense (A&D) sector dropped to rates consistent with the first half of last year. The industry is largely focused on portfolio optimization, driving assets coming to market at low- to mid-range values as well as strategic and focused acquisitions to build out capabilities and programs (including unmanned and space).

A contributing factor to the lower levels of activity is the Pentagon’s negative stance on further consolidation in the defense industrial base. We also see companies being laser-focused on opportunities that best fit their existing capability and customer sets. This results in selective acquisitions and a focus on divesting assets no longer considered core.

In the defense subsector, we would expect the level of deal activity to be stable for the remainder of 2023, absent geopolitical developments or other major events. For the commercial aerospace subsector, we expect the landscape to continue at a consistent level, with activity heavily tilted toward maintenance, repair and overhaul (MRO) and supply chain transactions.

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Integration is never easy

While we see CEOs in certain other sectors turning to transformative acquisitions to reposition and reinvent their businesses for long-term success, A&D leaders have been more heavily focused on fine-tuning their businesses to be as closely aligned with market opportunities as possible. However, integration is never an easy hill to climb, regardless of deal size. Retaining talent can be particularly challenging, especially for a smaller company being absorbed into a major prime contractor. We see companies focused on searching for paths where synergies can be harvested, controls and procedures can be aligned, and, yet, creativity and ingenuity are not stifled. Companies that strike this balance with deals that strengthen their core will most likely reap the largest benefits from their investments.

Learn more about leading practices and transformational mindsets in PwC’s new M&A integration report.

Key deal drivers

Budget priorities continue to drive activity

Geopolitical developments and the associated government budget priorities have typically impacted A&D dealmaking in a meaningful way. We see a particularly impactful set of circumstances in today’s environment, notably the war in Ukraine. While the conflict has not yet spurred a sizable wave of deals, we see a likelihood that a relatively fragmented defense base in Europe could see consolidation or — at the very least — a focus on increasing interoperability of platforms.

More broadly, continuing priorities such as unmanned, hypersonics, cyber, autonomy, drones and space will likely drive transactions. Private equity may have a sizable role to play in a rebound of activity given the substantial dry powder available. Also, such buyers may be attracted to a string of smaller add-on transactions to a portfolio business aligned with one of the key government budget spending areas.

Necessity for business reinvention

We see M&A activity in A&D more concentrated at the small- to mid-market end of the market, with a high degree of focus in specific areas. Regardless of the subsector or size of target, speed will be key to success.

In particular, as companies seek to reshape their portfolios to align with the best platform and market opportunities, doing so quickly and decisively will likely create the greatest chances for success. Our recent divestiture study indicates that of companies that tried to fix a “broken” business, value either stagnated or deteriorated in over half of those cases. A&D players are certainly not immune from such circumstances and may indeed suffer from them even more acutely given the long-term nature of many contracts and cost pressures. Private equity may be able to contribute in this regard, given their ability to move quickly with fewer potential roadblocks.  

“Deal activity in the remainder of fiscal year 2023 is expected to be consistent with current levels, which are running behind. Activity will likely be focused on small- to mid-market platform plays (cyber, unmanned, space) in the defense sector, while MRO and supply chain will be areas of focus in the aerospace sector.”

— Bob Long, US Aerospace and Defense Deals Leader
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