Defense Deals Have Dried Up--for Now

(MoneyWatch)  It might be tight credit. It might be that companies are waiting for the Obama defense budget to stabilize. It might just be that bigger companies are hoarding cash. Whatever the reason, defense Mergers and Acquisitions (M&A) fell to a ten-year low in 2009, according to PriceWaterhouseCooper.
In a recent report, the company found that large deals, those over $50 million, fell 62 percent compared to 2008. Total deals had a value of about $10 billion--the lowest in the last decade, and 54 percent lower than the previous year.

The figures are even more skewed because two deals made up twenty-five percent of the value and they were not traditional M&A events.

First, Northrop Grumman (NOC) sold off its consulting engineering arm, TASC, for $1.5 billion. This deal was done under duress as Northrop felt that new conflict of interest rules would limit its ability to bid on large hardware deals, which is its core industry.

The second was Boeing's (BA) $1 billion acquisition of its supplier, Vought, 787 airliner's production line. Vought, along with its partner the Italian aerospace giant, Finmeccanica, had a plant in Charleston, SC making assemblies for the new aircraft. Boeing wanted to establish a lower-cost non-union production line.

PriceWaterHouseCooper points out, though, that many small deals were completed as big companies continued buying small companies to broaden their product and market base. A good example is L-3 Communications' (LLL) recent purchase of Insight Technology Inc., which makes night vision equipment and other electro-optical devices. This allows L-3 to quickly expand their presence in a critical market.

If the banks begin to ease up on credit or the economy starts to improve, the M&A climate could improve. And ironically, if the defense budget stays flat or falls, there would likely be more M&A, rather than less, as fewer companies could nibble at the Pentagon pie. The U.S. may see a situation like in Europe where each country has one primary defense company and they all bid against each other for the world's business.