Aerospace M&A Takes Off
Houlihan Lokey's Antenucci expects this year's pace of M&A to outpace 2007 volumes
By Aleksandrs Rozens August 11, 2008
For bankers specializing in aerospace and defense businesses, mergers and acquisitions activity has been lively this year. Deals are being driven by large companies, so-called strategic buyers, that have been busy swallowing up smaller counterparts to expand product lines.
The M&A activity is also being driven by tax issues facing owners of companies up for sale and comes at a time when there is uncertainty about the next US President's spending priorities.
At Houlihan Lokey, the aerospace banking group has closed or signed 15 transactions in a six-month period, according to Anita Antenucci, a managing director at the investment banking firm who runs its aerospace investment banking effort. That compares with 19 transactions completed in 2007, says Antenucci. "I think that the number of deals will outpace last year's level. Within aerospace, it is still as busy as ever" when it comes to M&A.
Anita Antenucci
Houlihan's aerospace group, also known as the Aerospace Defense Government Group, has 25 investment bankers in Washington, D.C., and Los Angeles. When it comes to M&A transactions valued at under $500 million, the aerospace group at Houlihan is the leading provider of banking advice in the industry.
Other notable banking firms involved in aerospace and defense are Goldman Sachs, Credit Suisse, Morgan Stanley as well as Jefferies Quaterdeck. (Antenucci started her career at Quarterdeck before it was acquired by Jefferies.) Also, the now-defunct Bear Stearns was active within aerospace banking.
The deals managed by bankers at firms such as Houlihan are a fraction of the transactions completed within the aerospace industry. While billion-dollar deals capture headlines in the media, there are many more transactions valued in the hundreds of thousands to million dollar range.
Some sellers this year have been motivated by expectations that a change in the US administration after the Presidential elections could result in higher capital gains taxes next year, says Antenucci.
Also, some of the activity in aerospace has been driven by large firms looking to expand their product lines ahead of any changes in US government spending.
For example, Lockheed Martin Corp. purchased Pacific Architects Engineers Inc., a California company involved in military facilities operations and maintenance.
Houlihan's aerospace team of bankers advise mergers and acquisitions and the firm serves as an agent when it comes to raising money. Also, the aerospace team has been involved with corporate restructurings.
When it comes to mergers and acquisitions, Houlihan has found the US government, specifically different branches of the US military, have increased the use of unmanned vehicles. The importance of these unmanned vehicles has sparked not only startups but deal activity.
The heightened use of unmanned vehicles may have been what prompted Boeing Co. to buy Insitu Inc., a Bingen, Wash.-based developer and manufacturer of unmanned aircraft for intelligence and surveillance founded in 1994. That deal, unveiled last month, had Houlihan Lokey advising Insitu. Terms of the sale were not disclosed.
"Big defense companies want to ensure they can keep growth in a period where defense spending may be less robust," says Antenucci.
In the case of Insitu, the investors backing the unmanned vehicle maker included Battery Ventures, Second Avenue Partners and Pteranodon Ventures.
Another unmanned vehicle firm is Athena Technologies, a developer of flight controls. Athena was purchased by Rockwell Collins in March. Not only has Athena developed equipment for US, it is providing systems for the UK Ministry of Defense's UK Watchkeeper Tactical UAV Program, the largest unmanned aerial vehicle program in Europe.
Unmanned vehicles have been increasingly used by US military in Afghanistan and Iraq. These range from fixed wing craft to a hand launched piece of equipment the size of a basketball with a camera inside of it.
"They [unmanned vehicles] are definitely a theme in the industry," says Antenucci, adding that demand for these vehicles has created opportunities for entrepreneurs. "Barriers to entry [in the unmanned vehicle industry] are lower than in other sectors," she said.
Antenucci adds that new products for use on battlefields are more likely to be used because the US military can readily put them to use in Iraq and Afghanistan. "We are in an entrepreneurial environment where you can deploy technology sooner and get funding more quickly she says. "There is an urgent operational need."
That urgent operational need, in the parlance of US government, means new products can be purchased sooner because they need to be put into use quickly. "The contract term, urgent operational need means 'we [the military] need to buy the tools as soon as possible. I want to buy one now,'" says Antenucci.
While activity has been lively in aerospace, some financial buyers, such as private equity firms, may be less of a force. "They can borrow less so they pay less," says Houlihan's head of aerospace banking.
That said, the role of private equity in the aerospace and defense banking world should not be totally discounted. In March, Acquisition Solutions Inc., which advises government agencies on their purchases, was bought by Denver private equity firm Excellere Partners.
In addition to unmanned craft that allow US military to fly into treacherous airspace, there is still a need for video recorders that can be fitted into manned and unmanned craft. One such firm, TEAC Aerospace, was purchased by Goodrich Corp. in April. TEAC was a company owned by Thayer Hidden Creek, a private equity firm.
Meanwhile, the decision to sell an aerospace or defense business hinges on a variety of considerations. In some cases, founders want to cash out of their creation while in other cases a founder wants to sell to a larger company to gain access to more resources that will help them further build their business.
Some companies backing startups in aerospace such as developers of the unmanned vehicles can count on cashing out of their investment through a sale within three to five years. In some cases a business grows so rapidly that early investors can sell off their stake within a year, says Antenucci. "Sometimes, value is created in a short period of time."
When it comes to the mergers and acquisitions activity within aerospace, Antenucci says many deals are all-cash transactions. "Cash is cheaper for strategic buyers," she says, adding that in some cases buyers will use their company stock to retain managers.
That use of cash to buy a business may be one reason behind the steady wave of buying this year. For sellers being paid in cash there are tax considerations.
"Sellers are selling because they think they will pay higher capital gains next year," she says, referring to the upcoming Presidential election and possible changes in Washington's political landscape.
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