Mission Control: 2009 Annual and fourth-quarter review

 

The fast descent of deal values in A&D spurred by recession and the banking crisis of 2008 continued into 2009 with the first quarter of the year seeing a near-stalling of deal value. Since that time, deal values have revived but small deals continue to dominate the sector's activity. However, deal activity, as measured by the total number of deals, has stayed buoyant at near record levels as companies limit their acquisition budgets but continue to take advantage of opportunities to make small but strategic purchases.  Mission Control includes a report on innovation and economic recovery in the sector.

 

Key messages from this year's report:

 

A year of contrasts as sector health is balanced by caution

 

While 2009 started with much apprehension left over from 2008, it quickly rebounded in what, from a market perspective, was a very solid year for A&D companies.  On average, stock values were up roughly 30% for the year. This came despite widespread programme delays, continued tight credit markets, deleveraging, an economy that remains challenged, and a shift in the defence strategy away from previous large-scale "heavy" programmes to more intelligence-based and intelligence-support programmes.

 

Small is the name of the game as deal values dive

 

While deal activity stayed high, deal values plummeted. The average value of larger deals (US$50 million or more) fell 27% to US$379 million in 2009 from US$519 million in 2008.  The considerable moderation in deal ambition reflects continuing concern about programme cost delays and overruns, lower orders for large military platforms, reduced passenger and freight transportation. The overall reduction in M&A investment reflected these concerns. At the same time, we continued to see a flow of deals reflecting the growth in the security and surveillance sector.

 

Geographic footprint shifts away from Europe

 

European buyers, who had been very active international deal-makers in previous years, were relatively quiet in 2009. Similarly, there were few deals for European targets, either from within Europe or from outside buyers. Instead, much of the spotlight was firmly on North America. Deals with US targets and/or acquirers accounted for 84.4% of the total value of deals above US$50 million, an increase over the 72.6% achieved in 2008.

 

Deal values begin to perk up

 

Deal values were healthier at the end of 2009 than at the start. The three largest deals came in the second half of the year, two of them being US$1 billion plus transactions with the biggest coming at the end of the year.  The second, third, and fourth quarters each achieved an average transaction value that, while low, was greater than the previous quarter.  If credit markets continue to ease alongside rising stock markets, strategic acquirers will have greater financial flexibility to consider larger targets in 2010. Much will depend on the direction of key economic indicators in the first half of the year.