Lazard, a financial advisory and asset management firm, announced its predictions for aerospace and defense mergers and acquisitions (M&A) ahead of the Farnborough International Airshow (FIA). In addition to advising on M&A, the company also apprises restructuring and capital structure and strategy.
Michael Richter, managing director and global head of Lazard's Aerospace and Defense Investment Banking Group, suggested that with the return of FIA will come the realization of pent-up demand in M&A as companies investigate adding value to their businesses through diversification.
As of May this year, 148 M&A transactions had been announced, compared to 166 during the same period in 2021. M&A reached $125 billion last year, more than three times the total in 2020 ($39.8 billion), during the pandemic. In 2019, M&A totaled $119.2 billion.
Lazard identified key trends in five industry sectors that are set to influence M&A activity in its briefing last week:
Original Equipment Manufacturers (OEMs) and Tier 1 companies continue to consolidate their customer bases as sub-tier suppliers face challenges like skilled workforce, raw material price inflation, and industry standard price downs over the life of a contract.
Growing interest in business aviation and fixed base operations (FBO businesses) as on-demand aviation continues to trend.
Aircraft manufacturers will continue to diversify their expertise with investment activity in new-generation, alternative powered, technology platform programs.
The stabilizing of airline fleets and OEMs has committed to increased build rates, especially growing interest in narrowbody series aircraft.
Significant global air cargo demand and constrained capacity is driving a growth in funding for freighter conversions and production.
Supply chain issues continue to hinder production as specialist providers look to ramp up and seek opportunities presented by the rebound.
Airline disruption, ongoing health concerns, new business aviation models, and the development of air services infrastructure continue to drive a significant increase in business jet demand.
Aftermarket/MRO, Aviation Services
Prospective buyers continue to value businesses with aftermarket exposure, which reinforces M&A opportunities in this sector.
Aftermarket and Maintenance, Repair, and Overhaul (MRO)
M&A is expected to continue to be robust as aircraft utilization increases and shifting demand and supply dynamics drive investor confidence. MROs that support narrowbody aircraft will fare well; MRO capacity increases have shifted toward this type. Established MRO markets in North America and Western Europe are expected to marginally expand over the next few years. Asia-Pacific, including China, will be boosted by growth in domestic travel.
New space themes, including the proliferation of small satellite constellations, are generating public and private investment in launch systems, satellites, electronics, and analytics. Aerospace and defense suppliers that leverage their manufacturing expertise can further diversify revenue into the space supply chain through new OEM relationships, as well as Tier 1 and Tier 2 suppliers.
Defense primes are actively making investments in various technology programs and companies to gain access to new developments and fill product and capability gaps. Interest lies in defense electronics, C4ISR capabilities as government spend on detection, identification, tracking, and IT/cybersecurity reaches record levels. Smaller scale M&A is expected to continue with transaction volume set to outpace commercial activity in the next 24 months. Larger scale M&A transactions may be more challenged in the current regulatory environment. The U.S. defense budget demonstrates signs of a "super cycle" with President Biden’s spending exceeding the Trump Administration’s forecasts, as national priorities and renewed focus on warfare and technology are unlikely to lead to decreased funding levels. Russia’s invasion of Ukraine has highlighted the significance and necessity for the Department of Defense’s confirmed strategic shift away from anti-terrorism and counter-insurgency to near-peer conflicts, as they see an increased in unmanned aerial vehicles and quad drones for surveillance.