Back to news

January 21, 2020 | International, Aerospace

The New Trend In Acquisitions: Mergers Of Equal But Different

Michael Bruno

Woodward, Hexcel, United Technologies, Raytheon, L3 Technologies and Harris at first glance have relatively little in common, except they are mostly midsize suppliers and specialists primarily serving the aerospace and defense (A&D) market.

Increasingly, that is exactly why they are pairing up—and if other recent deals are an indication, it could be one of the leading trends this year in A&D mergers and acquisitions (M&A).

On Jan. 12, aircraft motion-control specialist Woodward and composites leader Hexcel proposed stock merger to create one of the largest independent A&D suppliers, with capabilities running from wing and engine parts to advanced materials used to make aircraft construction lighter. The companies have minimal sales overlap, which could help ease approval by antitrust regulators.

The combined company, Woodward Hexcel, would hold key supplier positions on most major A&D programs, including: the Airbus A220, A320neo, A330neo and A350; the Boeing 737 MAX, 777X, 787 and Apache helicopter; Bombardier Global 7500; Embraer E-Jets E2; Gulfstream G500/600; and Lockheed Martin F-35 and CH-53.

Perhaps more important for shareholders, the “merger of equals” between Woodward and Hexcel could become a lucrative stake. According to the companies, their combined revenue of $5.3 billion would place the new Woodward Hexcel sixth among major A&D suppliers (see graph). What is more, the combined company, which will be based in Fort Collins, Colorado, should generate about $1 billion in free cash flow—the proceeds used to fuel shareholder returns—in its first year. In turn, around $1.5 billion is expected to be sent to shareholders within 18 months of the deal's completion. The deal is expected to close in the third quarter of 2020.

Initially, financial analysts who cover publicly traded A&D companies were surprised by the proposed combination. But tie-ups that see midsize specialists combining to provide greater portions of A&D systems and parts are likely to become more commonplace. Last summer, L3 Technologies and Harris paired to form L3Harris Technologies. By the summer of 2020, United Technologies and Raytheon are expected to close their own “merger of equals” to become Raytheon Technologies.

“I think this deal is very similar to several other aerospace deals that we've seen the last 3-4 years,” Credit Suisse analyst Rob Spingarn says of Woodward Hexcel. “Right off the bat, it looks a lot like Harris and L3. If you line up the PowerPoint presentations from the two deals, they are almost mirror images of each other.”

To that end, all of these companies have talked about increasing the amount of dollars spent on research and development (R&D). However, the so-called synergies from the combination of Raytheon Technologies are years off—assuming they occur at all—while rewards for shareholders will be almost immediate.

The CEOs of Woodward and Hexcel assert that they will spend $250 million on R&D in the first full year after the deal closes, which according to analysts, is roughly in line with what they were going to spend separately. At the same time, the combined company expects to cut at least $125 million worth of recurring and redundant costs.

Of course, each deal has its own criteria for justification: United Technologies looked to gain heft to fight off Airbus and Boeing supply-chain squeezes; Raytheon needed deeper pockets to fund defense technology plays; and L3 and Harris each wanted to become defense primes. Last but not least, Woodward and Hexcel CEOs say they see genuine opportunities to help commercial aviation become more sustainable through the lighter, more efficient design of aircraft and engines.

A&D M&A consultants are preparing to release their year-end summaries for 2019, but dealmakers already are telling Aviation Week they expect a robust environment for M&A deals in 2020, albeit not universally across the industry.

For instance, sub-tier commercial aviation suppliers like “mom and pop shops” will continue to be gobbled up, especially by private equity investors directly or through holding companies as they seek to form new middleweight suppliers. Defense technology specialists also remain hot targets, as evidenced by the mid-December announcement that government services heavyweight Leidos is buying boutique aircraft and defense systems provider Dynetics for $1.65 billion. But consolidation in space may take top billing amongst the bevy of startups funded by a venture capital surge in recent years, with major assets such as Maxar Technologies' MDA subsidiary being sold to private equity investors at the end of December.

Space-sector combinations could be another major trend for 2020, according to Matt O'Connell, managing partner at Seraphim Capital—the firm that funded the buildup of GeoEye, now a core part of Maxar after MDA. “I think there are a lot of deals out there waiting to be done,” he says.

https://aviationweek.com/air-transport/new-trend-acquisitions-mergers-equal-different?

On the same subject

  • Poll: Germans, Americans far apart on use of military, defense spending

    March 11, 2020 | International, Aerospace, Naval, Land, C4ISR, Security

    Poll: Germans, Americans far apart on use of military, defense spending

    By: Sebastian Sprenger COLOGNE, Germany — Germans and Americans remain far apart on defense issues, ranging from when to use the military, how much to spend on defense and which country poses a bigger challenge — Russia or China — according to a new study unveiled Monday. “Three years into a turbulent period of American-German relations, with Donald Trump at the helm of American foreign policy and Angela Merkel leading Germany, there continues to be a wide divergence in views of bilateral relations and security policy between the publics of both countries,” said a Pew Research Center study published in cooperation with Koerber Stiftung, a German think tank. The two organizations each polled about 1,000 adults in September 2019 in the United States and Germany. Also included in the data are results from Pew's “global attitudes” survey conducted in both countries during the spring and summer of 2019. The results are unlikely to surprise anyone following trans-Atlantic relations, but they put into perspective why deep-seated differences persist in crafting a more coherent political show of force between the two nations. While roughly 80 percent Americans believe that using military might is sometimes necessary to maintain order in the world, Germans were almost split evenly on the same question, with a slight majority disagreeing. On the question of defending a fellow NATO ally against Russia in the event of a conflict, 6 in 10 Americans said the United States should help, whereas 6 in 10 German respondents said their country should not get involved. At the same time, Germans saw the United States high up in the list of key foreign policy allies, much higher than Americans viewed Germany. Asked to name their most or second-most important partner, 42 percent of Germans mentioned the United Sates, surpassed only by the their top choice of France, at 60 percent. For Americans, the British ranked highest on the same question, at 36 percent, followed by China (23 percent), Canada (20 percent) and Israel (15 percent). “One area of convergence is the broad support in both the U.S. and Germany for more cooperation with France and Japan. And similar majorities in the U.S. and Germany want to cooperate more with China,” the study read. As for cooperation with Russia, “Germans are almost twice as likely as Americans to want greater collaboration,” it added. When it comes to defense spending, 35 percent of Americans felt that Europeans should up their military budget, with 50 percent saying it should stay the same and 9 percent saying it should decrease. In 2017, the share of Americans wanting an increase was 45 percent. In Germany, the acceptance for defense budget increases has grown since 2017, when only 32 percent of those polled voiced support and 50 percent wanted it to remain the same. In 2018, 43 percent of respondents supported an increase. At the mid-February Munich Security Conference, much was made about the European Union's need to “learn to use the language of power,” as Josep Borrell, the bloc's defense and foreign policy chief, put it. That, of course, would cost money. Germans have traditionally frowned upon that kind of talk, though there is an increasing awareness of geopolitical perils in the wake of Russia's annexation of Crimea in 2014, Jeffrey Rathke, president of the American Institute for Contemporary German Studies at Johns Hopkins University, said in an interview last month. “Germany has been able to get by with its rhetorical response to the deteriorating security environment,” he said. “Now it's increasingly obvious that that is no longer enough.” While the country has significantly upped its defense spending, sensitizing the public for operational contributions to Europe's security will be a crucial next step for this government and the next, Rathke argued. The Pew and Koerber figures point to a generational change in the general attitudes of Germans and Americans about one another. “Despite these divergences in opinion, young people in both countries have more positive views of the U.S.-German relationship,” the study read. “In the U.S., for example, 82 percent of people ages 18 to 29 say the relationship is good, compared with 73 percent of those ages 65 and older. Similarly, in Germany, four-in-ten young people say relations with the U.S. are good, compared with only 31 percent of those 65 and older.” Notably, the two countries' militaries enjoy a much closer level of cooperation than the political discourse suggests, especially during the Trump administration, a fact that officials in both countries keep stressing when the tone between Berlin and Washington turns particularly icy. “There is an instinctive perception in the German public to defense matters anchored in Europe and the trans-Atlantic alliance,” Rathke said. https://www.defensenews.com/global/europe/2020/03/09/poll-germans-americans-far-apart-on-use-of-military-defense-spending/

  • NASSCO readying for one program’s end, downturn in repair workload

    February 27, 2024 | International, Naval

    NASSCO readying for one program’s end, downturn in repair workload

    NASSCO is looking for new work to follow behind the soon-to-end Expeditionary Sea Base program, and is also hoping for an uptick in repair workload.

  • Rising ammunition prices set back NATO efforts to boost security, official says | Reuters

    September 17, 2023 | International, Security

    Rising ammunition prices set back NATO efforts to boost security, official says | Reuters

    NATO has been pressing for a production boost to satisfy soaring demand for weapons and equipment since Russia's invasion of Ukraine. A major concern has been a shortage of 155mm artillery rounds, with Kyiv firing up to 10,000 per day.

All news