The defense industry reported over 574 transactions worth US$62.6 billion in 2011.

Wednesday 21 March 2012, Amsterdam

The defense industry reported over 574 transactions worth US$62.6 billion in 2011.  Deal activity fluctuated on a monthly basis and peaked in June 2011, while September 2011 recorded the lowest activity. Second half of the year recorded a decline in deal activity compared with first of the year.
When considering quarterly deal activity, deal activity was the highest in Q22011 and the lowest in Q32011. Majority of the transactions in the defense industry were M&A transactions followed by partnership transactions. 

The C4ISR Electronics and IT sector dominated the deal activity in the year, followed by the aerospace products and parts manufacturing segment. PE/VC investments in the industry in 2011 stood at US4.6 billion, the majority of these investments went into C4ISR Electronics and IT space. M&A activity was dominated by C4ISR Electronics and IT segment.

The C4ISR Electronics and IT segment recorded the highest deal activity in 2011. The segment recorded two deals with a value of US$1.0 billion or above. United Technologies’ acquisition of Goodrich, worth US$18.4 billion, was the largest deal in the segment, followed by EchoStar’s acquisition of Hughes communications for US$2.0 billion. North America maintained its dominance over other regions in the key M&A deals reported in the C4ISR Electronics and IT segment in 2011.

The North American region accounted for the majority of the deal activity in 2011, followed by the European region. The Asia-Pacific region was the third most active in terms of overall deal activity and mainly driven by growth in emerging markets such as China and India.
In BRIC (Brazil, Russia, India and China) countries, India dominated the deal activity with most number of deals, while Brazil was the least active country in the group.

M&A activity in 2012 is expected to be driven primarily by federal military budget cuts, opportunities arising from emerging markets such as China, India and Saudi Arabia, and unrest in the Middle East and Africa.
Major defense spenders such as the US, the UK, and France proposed cuts in their spending in 2012, which could directly impact the top line of defense contractors. In such a scenario, major companies may shed slow growth businesses and medium-sized companies could look to consolidate their businesses. This trend is more likely to be visible in the European and the North American region in 2012. In addition to domestic market consolidation, defense companies could also expand into high growth sectors such as civil aviation components, defense technology, and cyber security. The acquisition of Goodrich Corp by UTC in 2011 could trigger another wave of consolidation in the industry in 2012. Such a consolidation is inevitable in the current market conditions, with downward pressure on margins and limited orders.