Mergers, markets, missing friendsStory
October 05, 2020
One impact of the COVID-19 pandemic has been a decrease in mergers and acquisition (M&A) activity in the defense industry – and to some respect others – at least in the beginning of it all, when everyone was shutting down and didn’t know what to expect from the crisis. Folks were sheltering in place and in lockdown across the globe, not exactly an environment conducive to multimillion and multibillion-dollar acquisitions. Deals like that so often rely on face-to-face interaction.
In Deloitte’s “2020 Aerospace and Defense Industry Outlook: A midyear update,” analysts caution that while M&A has been strong for the last five years and will benefit from growth in C4ISR, unmanned systems, hypersonics, and the like, the 2020 presidential election and economic slowdowns are in fact shaping current M&A considerations. The study authors assert that “further industry consolidation is possible as some of the smaller companies may not be able to meet the increased financial, program management, skills, risk-taking, and investment requirements. Consolidation by parts family, i.e., components, aero-structures, electronics, and interiors, is expected to continue … .”
We are seeing some of that consolidation in the embedded electronics space, where there has been a handful of acquisitions throughout the pandemic. The largest of these is the purchase of signal-processing and power-management company Maxim Integrated Products by Analog Devices for about $21 billion, in an all-stock deal.
NVIDIA continues to be a behemoth in the commercial semiconductor world, making big news recently with its intent to acquire chipmaking giant Arm for about $40 billion. While the military is not NVDIA nor Arm’s largest market, NVIDIA-based embedded solutions are quite popular in the military electronics market. Connect Tech’s success selling NVIDIA-based devices made the Ontario-based rugged computer maker quite attractive to HEICO, which purchased Connect Tech this summer and made it a subsidiary, with its leadership staying in place.
More recently, Curtiss-Wright’s Defense Solutions division announced that it intends to acquire the stock of Pacific Star Communications (PacStar), a provider of secure networking communications systems for defense applications. A security acquisition was also made by Wind River when it acquired Star Labs at the start of the year, just before the pandemic.
Security and command, control, computers, communications, intelligence, surveillance, and reconnaissance (C4ISR) applications also look to remain strong funding areas through 2025, according to analysts at Frost & Sullivan. They estimate that market spending for C4ISR programs will grow to about $58.5 billion by 2025 from $53.6 billion in 2019, at a compound annual growth rate (CAGR) of 1.5% in their analysis, titled “Assessment of the US DoD C4ISR Market, Forecast to 2025.”
“C4ISR and IT industries are converging around artificial intelligence, machine learning, data analysis, self-healing networks, and cloud computing,” says Brad Curran, Aerospace & Defense Research Analyst at Frost & Sullivan. “Going forward, naval, airborne, and ground tactical networks are overly complex, making the networks too difficult to establish and defend. To resolve this problem, DoD requires integration and cybersecurity services from the defense industry.”
In addition to the C4ISR spending increases predicted by Frost & Sullivan, radar and electronic warfare applications are also expected to see growth, due to necessary upgrades as militaries deal with merging adversarial threats, including newer ones such as hypersonic weapons. This will likely remain the case even if the administration changes in January. The threats will only get more complicated, no matter who sits in the Oval Office.
In the Deloitte report cited above, analysts referenced this stability and growth, stating “Defense expenditure is expected to grow between 3 and 4 percent in 2020 to reach an estimated US$1.9 trillion, as governments worldwide continue to modernize and recapitalize their militaries.”
With good news, alas, also comes sad news: While writing this column, I learned that Ian McMurray, longtime communications manager and public relations man for Abaco Systems (formerly GE Intelligent Platforms, and before that Radstone Technology) passed away at age 67 after a battle with cancer. I was very sad to hear this. Ian was a class act and a gifted and prolific writer. We first met at the old Bus & Board event some 15 years ago. Although it’d been some time since I’d shared a drink with him at an event, I enjoyed our chats each year and will miss his dry wit, kindness, and professionalism.
His colleagues at Abaco Systems often spoke of his ability to turn dry engineering copy on complicated subjects into clear articles that could be understood by all. Ian also worked as a journalist at IBC.org, where his colleagues wrote a lovely tribute to him (read it here: https://www.ibc.org/obituary-ian-mcmurray-ibc-daily-reporter/6822.article). I know from our chats how much pride he took in his writing and journalism work, but more than anything, he was proud of his family. Our thoughts are with them.