U.S. Aerospace Component Industry Sees Continued M&A Activity In 2008
During 2008 the U.S. aerospace component industry experienced a strong performance in mergers & acquisitions (M&A), with the same number of transactions (52) as the record set in 2007. Activity was again weighted toward the first half of the year (in a 60/40 split), with a similar number of transactions in the second half of 2008 as 2007, according to a report issued by the Grant Thornton Corporate Finance LLC the mergers and acquisitions investment banking practice of Grant Thornton.
The report noted that the strong level of aerospace component activity is in stark contrast to U.S. M&A activity as a whole, which declined by a third in volume terms from the prior year (and substantially more by value).
Although 40 percent of M&A aerospace component transactions were led by private equity groups, this masks a shift in the second half where strategic buyers proved more successful in winning bids (by a factor of 3:1). Private equity buyers found it harder to raise the levels of debt that supported prices of previous acquisitions. Publicly traded aerospace component companies, meanwhile, generally remain well capitalized —providing them financial flexibility for continued acquisitions.
"Founders again comprised the majority of sellers of businesses (71 percent), with owners attracted to a transaction by: reaching retirement age, receiving unsolicited approaches and diversifying their net-worth at a time when their businesses are generating strong earnings. Perhaps even more importantly, many component manufacturers have grown to a scale where they are simply no longer suitable for individual ownership," said Ian Cookson, Director, Grant Thornton Corporate Finance LLC's Mergers & Acquisitions Aerospace and Defense Group, based in Boston, MA.
Cookson added that founders feel they are constraining the growth of their businesses, as the funding required to expand a capital intensive operation from say $30 to $60M in revenue is simply beyond the risk appetite and capabilities of many founders and their families.
Aerospace Composite businesses are particularly in demand due to the rapid adoption of composite components on new generation planes. Consequently, traditional metal manufacturers can no longer ignore the importance of securing composite capabilities, while few composite acquisition targets of scale are available.
The MRO, component repair, and distribution sub-sectors have also seen significant transaction activity—with over 50 M&A transactions worldwide during the last three years. The sector has been going through realignment with almost half transactions compromising corporate spin-offs of non-core operations to acquirers providing dedicated supply chain services.
Non-aerospace defense components and systems businesses also saw a strong if slightly lower level of activity. Prime aerospace and defense contractors continued to acquire niche technology defense equipment and service businesses (software, surveillance, global positioning, and communication equipment/services) that expand their capabilities to win large defense contracts. Component manufacturers meanwhile have been acquired by tier two suppliers and product specialists.
"The same level of M&A activity experienced during 2008 is unlikely to be repeated in 2009. Nevertheless, a reasonable earnings outlook, demand for fill-in acquisitions and the smaller size of transactions in the sector (which are more easily financed) point to an ongoing, if lower, level of activity," concluded Cookson.
SOURCE: Grant Thornton Corporate Finance LLC