Aerospace Puts M&A in Its Sights

It is an industry already stacked with big players—but apparently, they’re just not big enough.

In a race to merge, the aerospace and defense industry has already this year proposed deals that, value-wise, are 25% ahead of last year’s pace. And that’s coming off a record 2017, when the industry spent an ear-popping $72 billion on deals. Now comes another large, transformative deal: last week’s roughly $15 billion merger of equals between Harris Corp. and L3 Technologies.

“Fundamentally, companies have decided that scale matters,” says Jon Barney, a Korn Ferry senior client partner who specializes in the aerospace and defense industry.

Barney is cautious, however. “Large-scale deals such as those recently announced are extremely complex and carry risk of underperformance to shareholders,” he says. The complexity makes uniting corporate cultures a major challenge. That, coupled with the fact that the industry’s players already are in a war for talent, heightens the risk of failure for any company involved in a large-scale deal.

For the latest consolidation run to produce dividends, Barney says the industry must improve talent assessment, onboarding, and succession planning. He suggests firms establish a talent alignment office concurrent with each deal, sort of like a project-based transition team, to facilitate a people strategy to go along with the business rationale for a deal.

The Harris-L3 merger, for instance, creates the sixth-largest US defense contractor. Boeing, Northrop Grumman, and General Dynamics—three of the five bigger firms—also announced or completed large deals in the last 12 months. With those companies and others in the sector reporting third-quarter earnings beginning this week, Barney says M&A will certainly be a topic of interest.

One factor driving deals is international expansion. As global security issues have risen, non-superpowers have gotten into the aerospace and defense game in a bigger way, creating opportunities for companies to methodically expand into international markets. In many cases, Barney says, buying is a cheaper and faster way to enter an international market than building organically.

Deal activity is also being driven by a desire to diversify services and offerings to clients. Global passenger traffic is growing, meaning more orders for commercial jets and equipment, which, in turn, is leading companies to pursue a vertical integration strategy. Earlier this month, for instance, Boeing completed its purchase of KLX, a parts and services supplier to the aviation industry, for $4.25 billion. Aerospace and defense companies are also looking for deals that present strategic synergies across the supply chain and other areas as a way to combat profit-margin pressure from increased competition.

“There is strong growth right now. Defense spending is up. Commercial orders are strong. The market is bullish about the sector,” Barney says.

Authors

  • Jon Barney

    Senior Client Partner

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