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Defense M&A Continues

by: Matthew Potter
December 15, 2010

Category: Business Line, CACI, Companies, development program, Elbit, IT, logistics, Military Aviation, production program | RSS 2.0

The world wide defense industry continues to consolidate as contractors larger-and-small continue to acquire other companies to expand their roles in certain business lines or due to shrinking defense budgets causing a refocus. Several deals closed or where announced in the last few months.

Last month for example Cubic Corporation (CUB) announced that they would move to acquire Abraxas Corporation. Cubic provides test support and range services to a variety of defense customers worldwide. Abraxas supports cybercrime and defense and security customers. The deal was estimated to be worth around $124 million. Last week Cubic received regulatory approval for the acquisition to go forward.

CACI (CACI) the large intelligence and IT service support contractor as of 1 November completed its acquisition of privately held TechniGraphics. TechniGraphics provides geospatial services and this will expand CACI’s ability to gain market share. CACI has done very well over the last few years and some consider its business model as the way most defense contractors will go as the large hardware contracts become fewer due to budgetary pressures.

The Israeli defense contractor Elbit who manufacture aerospace systems including UAV as well as parts and support services for aircraft completed its acquisition of the U.S. company M7 Aerospace yesterday. The $85 million sale will allow Elbit more penetration of the U.S. market as M7 provides government and commercial customers aviation logistics, maintenance and supply chain management. Due to export control and security laws and regulations it is often easiest for overseas companies to establish U.S. subsidiaries or acquire U.S. companies to enter its defense market.

M&A has been picking up as the market adjusts to the expected flattening or decline of the U.S. and European defense budgets. As the funding shrinks it will cause companies to consider their products and market shares. Some will want to sell parts to get out of those business areas and some will want to acquire to get into them.

The biggest deal that is hanging out there is what Northrop Grumman (NOC) wants to do with its ship building group. Previously they have stated they would like to sell it as declining U.S. Navy ship building plans limit their opportunities. Depending how the U.S. defense budget ultimately resets these plans could be reconsidered.

These trends will continue and may accelerate over the next few years as the defense industry adjusts as it did in the Nineties to the changing market.

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