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Mission control

Fourth-quarter 2015 aerospace and defense


industry mergers and acquisitions analysis
Highlights
Executive summary

Deal activity
Deal market characteristics
Large deals
Methodology

Resources

To our Mission control readers


Welcome to Mission control, PwCs analysis of deal activity in the aerospace and defense (A&D) sector.
In our fourth quarter edition, we provide an overview of deal activity for the full year, as well as
expectations for deal activity in 2016.

Chuck Marx
US Aerospace &
Defense Leader

Two thousand and fifteen was a record year in M&A for the A&D sector with a total deal value of $61.7
billion, nearly three times the value in 2014 and more than 50 percent higher than the previous record
year in 2007. Deal volume declined 20 percent in 2015, to 43 deals, over the same period. Average deal
size more than tripled to $1.4 billion in 2015, compared to 2014. However, 2015 experienced increased
activity in undisclosed deals and deals valued under $50 million, specifically in China which increased
to 46 deals, compared to 28 deals in 2014. The fourth quarter declined in deal value by 50 percent, to
$2.1 billion, compared to Q4 2014 and deal volume declined by greater than 40 percent, to nine deals,
over the same period.
Megadeal volume remained flat, on a year-over-year basis, however, the average megadeal value
increased from $2.3 billion in 2014 to $8.5 billion in 2015. The megadeal average was driven primarily
by the largest deal announced in 2015 - Berkshire Hathaways acquisition of Precision Castparts (PCP)
for a value of $37.2 billion, the largest deal in sector history (however, to remain constant with PwC
analysts methodology the deal value used for analysis is the transaction value less existing net debt,
which is valued at $31.6 billion). This deal speaks to the positive outlook of the commercial aerospace
market and PCPs current position on key commercial growth platforms, high margins, and stable free
cash flows.

The largest defense deal in 2015 was Lockheed Martins acquisition of Sikorsky Aircraft, valued at $9
billion. The deal was driven by United Technologies portfolio review and the decision to reposition the
company to focus solely on providing high-technology systems and services, resulting in the
divestiture of their OEM (original equipment manufacture) defense and commercial helicopter
business. This deal is among the top six of all time (1. Berkshire Hathaway/Precision Castparts, 2.
UTC/Goodrich, 3. British Aerospace/Marconi Electronic Systems, 4. Boeing/McDonnell Douglas, 5.
Raytheon/Hughes Aircraft, 6. Lockheed Martin/Sikorsky). The deal clearly outlines Lockheed Martins
rationalized focus, as predominantly a mission-focused air and space platform provider, while
allowing the deployment of large cash reserves. Lockheed Martin has already announced, in January
2016, to divest its IS&GS (Information Systems & Global Solutions) business in a transaction with
Leidos through a Reverse Morris Trust technique, which provides Lockheed with $1.8 billion and
Lockheed shareholders will receive roughly 50.5 percent of the combined company.
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This deal defines Lockheeds strategy to reshape their portfolio makeup for the future and could spur
further megadeals in 2016. Commercial aerospace companies reducing their exposure to declining
defense budgets and Tier 1 and Tier 2 defense supplier consolidation, seeking cost efficiencies, should
be a continued theme in 2016.
Increased cyber attacks, threats of terrorism, and greater geopolitical instability continue to drive
activity towards targets with capabilities in electronic warfare, C4ISR (Command, Control,
Communication, Computers, Intelligence, Surveillance and Reconnaissance) and cybersecurity. These
capabilities are more attractive for A&D investors that are looking to align and strengthen their
defense technology portfolios. The acquisition of Exelis Inc. by Harris Corp. valued at $4.5 billion was
an expected consolidation of Tier 1 suppliers within the defense electronics segment. This deal now
expands Harriss defense portfolio to include electronic warfare capabilities, along with positioning
them as a leader in air traffic management. Raytheons acquisition of Websense (recently rebranded as
Forcepoint, and valued at $1.9 billion) further demonstrates consolidation among key cybersecurity
players. Raytheon plans to combine their current cyber business with acquired Websense to expand
and strengthen their portfolios and capabilities to better protect companies from cyber-attacks and
data theft.
PwCs Aerospace & Defense practice is monitoring several additional trends expected to
affect the characteristics of deals in the sector:

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US defense portfolio alignment. Defense contractors continue to look for opportunities for
growth and cost reductions, however, the United States and European governments continue to
discourage further prime contractor consolidation. This means further defenses acquisitions are
going to take place among the Tier 1 and Tier 2 supply base in a continued effort to exit government
services businesses and enter the high-tech intelligence products segment, focused in C4ISR,
electronic warfare, cybersecurity, and RPAs (Remotely Piloted Aircraft) markets.

Government services consolidation. We expect continued consolidation in the government


services sector. Government services will consolidate by 25 - 50 percent over the next three to five
years, as companies replace the scale which was lost by reduced activity in Iraq and Afghanistan, as
well as reductions in government spending, and increase scale to improve affordability and
competitiveness. We expect the industry to consolidate, to a half dozen large companies of $5 - $10
billion in revenue.
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Financial investor activity. Stable revenue generation and a noteworthy order backlog for
commercial airplanes continues to attract private equity and financial buyers to the sector. M&A
activity among financial investors is expected to continue as they target companies with disjointed
portfolios or those heavily discounted due to defense budget uncertainty. Investors are also looking
to enter the A&D market through acquisition of companies highly focused on commercial growth
platforms, best represented by Berkshire Hathaways acquisition of Precision Castparts.
Supply chain consolidation. Commercial OEMs and large Tier 1s are demanding more
integrated systems and complete sub-systems from the fragmented supply base, as the industry
embarks upon a historic aircraft delivery ramp. An example of this consolidation of Tier 1 suppliers
is GKNs acquisition of Fokker Technologies. GKN can merge the two companies aero structures
businesses together and offer more integrated systems through the addition of Fokkers electrical
wiring interconnection systems.
Aftermarket consolidation. The highly fragmented MRO (maintenance, repair and overhaul)
segment continues to see niche deal activity as the segment further consolidates. Enhanced services
capabilities, expanded geographic reach and margin expansion continues to drive strategic
investors deal activity to gain market share and strengthen MRO businesses. The industry is still
waiting for an effective and sustainable vision for digital aviation to present itself. This presents
an opportunity for innovation and revenue growth in this $60 billion fragmented market.
Two thousand and fifteen saw an increase in activity and we feel that 2016s M&A outlook for the
sector is expected to remain focused around the steep commercial aerospace production increases,
and further portfolio alignment among defense contractors. As the United States and Europe continue
to face budget uncertainty and greater threats of terrorism and geopolitical unrest, companies may
continue to strengthen their commercial aerospace platform exposure and defense capabilities focused
on electronic warfare, C4ISR and cybersecurity. We expect activity in the A&D sector to proceed at a
healthy pace in both the commercial aerospace and defense segments of the sector.
We hope this analysis will serve as a useful tool for monitoring trends. Launch the data explorer at
http://www.pwc.com/us/missioncontrol for a deeper dive into the data, or contact us to further
discuss our insights.

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Deal activity
Deal volume and value (2006-2015) all deals

62.8

400

60

350

50

300
41.3

250

40
30

200

30.0
23.1

22.2

20
9.1

10

24.3

22.0

150

14.3

13.4

Deal volume

70

Deal value ($bil)

Two thousand and fifteen


was a record year in
M&A for the A&D sector
with a total deal value of
$61.7 billion (for deals
>$50M) , nearly three
times the value in 2014
and more than 50 percent
higher than the previous
record year in 2007.

100
50

0
2006

2007

2008

Total deal value ($bil)

2009

2010

2011

2012

2013

2014

2015

Number of deals

10-year historical deal value and volume table all deals

Total Deal Value ($ bil)


Number of Deals

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2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

22.2

41.3

23.1

9.1

13.4

30.0

22.0

14.3

24.3

62.8

228

291

306

270

289

299

297

258

306

350

Deal activity
Total deal value, by status (2014-2015) disclosed
deal value of $50M+

Total deal volume, by status (2014-2015) disclosed


deal value of $50M+

70

60

60

50

50

Deal volume

Deal value ($B)

Deal value increased


by 160 percent in the
A&D sector despite a
20 percent decline in
volume in 2015,
compared to 2014.

37

40
30
20

10

18

10

40
13
30
20

44
30

25

10
6
3

2
0

2014

2015

2015 Q4

2014

2015

2015 Q4

Pending, Unconditional, Intended

Pending, Unconditional, Intended

Completed, Part comp

Completed, Part comp

Deal value increased by 160 percent from $23.8 billion in 2014 to $61.7 billion in 2015 of pending,
unconditional, and intended deals accounted for 60 percent ($37.2 billion) while the value of
completed/partially completed deals accounted for 40 percent ($24.6 billion) of the total deal value in
2015. In the fourth quarter, deal value declined by more than 50 percent on a year-over-year basis.
Deal volume declined by 20 percent from 54 deals in 2014 to 43 deals in 2015. On an annualized basis,
volume of pending, unconditional, and intended deals increased by 30 percent (from ten deals to 13
deals) while volume of completed/partially completed deals declined by 32 percent (from 44 deals to
30 deals) compared to 2014. In the fourth quarter, volume of deals declined by more than 40 percent
on a year-over-year basis.

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Deal market characteristics


North America
dominated the deal
activity, accounting
for 91 percent of
global deal value and
63 percent of global
deal volume in 2015

M&A global map for 2015 deals disclosed deal value of $50M+

UK & Eurozone
Local 5 deals, $1.7B
Inbound 7 deals, $2.4B
Outbound 4 deals, $3.1B

Europe ex-UK
& Eurozone
Local 1 deal, $0.1B
Inbound 0 deals, $0
Outbound 0 deals, $0

North America
Local 15 deals, $50.4B
Inbound 4 deals, $3.1B
Outbound 8 deals, $2.5B
Asia & Oceania
Local 10 deals, $3.9B
Inbound 1 deal, $0.1B
Outbound 0 deals, $0

South America
Local 0 deals, $0
Inbound 0 deals, $0
Outbound 0 deals, $0

Africa/Undisclosed
Local 0 deals, $0
Inbound 0 deals, $0
Outbound 0 deals, $0

Globally, local deals decreased as a proportion of total deal volume, accounting for 56 percent of
activity, compared to 64 percent in 2014.
North America dominated the deal activity, accounting for 91 percent of global deal value and 63
percent of global deal volume in 2015. The region registered $56 billion as deal value and 27 deals in
volume. 91 percent of the deals in North America were local deals. This also includes the largest
megadeal worth $31.5 billion, which comprised more than 60 percent of total megadeal value. UK &
Eurozone ranked second with 16 deals valued at $7.2 billion in 2015. Deal activity involving China
(including undisclosed deals and deals < $50 million) increased 64 percent in 2015, to 46 deals,
compared to 28 deals in 2014.

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In the fourth quarter, North America, UK & Eurozone and Europe (excluding UK & Eurozone)
witnessed significant decline of around 90 percent in their deal values. Deal volume also declined
considerably in North America and UK & Eurozone by 60 and 75 percent, respectively.

Deal market characteristics


Deal value was
largely concentrated
in the Aerospace and
MRO category in
2015, with 69 percent
share of total deal
value for the year

Deal value by Aerospace & Defense category


(2006-2015) disclosed deal value of $50M+

100%
90%

Deal volume by Aerospace & Defense category


(2006-2015) disclosed deal value of $50M+

100%

4%

10%

15%

18%
25%

29%

35%

37%

80%

90%

23%

26%

20%

80%

40%

35%

33%

33%

38%

16%

15%

29%

56%

70%

5%

8%
14%

18%
39%

57%

70%

61%

23%
7%

60%
31%
50%

60%

35%

16%

11%

11%

69%

30%

11%

69%

68%

49%

54%

49%
20%

40%

43%

53%

44%

33%

43%

32%

10%

9%

61%

30%

58%

36%

19%

40%

76%

67%

40%

23%

50%

27%

40%

20%

24%

30%

10%

0%

0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Aerospace & MRO

Space & other

Defense

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Aerospace & MRO

Space & other

Defense

Deal value was largely concentrated in the Aerospace and MRO categorized deals in 2015 - 69 percent
share of total deal value. Berkshire Hathaways announcement to acquire Precision Castparts for a value
of $31.6 billion accounts for 73 percent of the total Aerospace and MRO total deal value. The Aerospace
and MRO category also accounted for more than half the total deal volume in 2015, at 53 percent. The
Defense category declined both in percentage of volume and value in 2015, compared to 2014.

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Large deals
Megadeals value
increased more than
threefold in 2015,
from $13.9 billion in
2014 to $50.9 billion.

Mega-deals in 2015 (deals with a disclosed value of at least $1 billion)


Date
announced Target name
Target nation Acquirer name
08/10/15
Precision Castparts Corp. United States Berkshire Hathaway Inc.
07/20/15
Sikorsky Aircraft Corp.
United States Lockheed Martin Corp.
02/06/15
Exelis Inc.
United States Harris Corp.
09/23/15
Landmark Aviation
United States BBA Aviation PLC
04/20/15
Websense Inc.
United States Raytheon Co.
03/18/15
Shifang Mingri Yuhang
China
Xinjiang Machinery Research
Industry Co. Ltd.
Institute Co. Ltd.

Acquirer nation
United States
United States
United States
United Kingdom
United States
China

Status
Pending
Completed
Completed
Pending
Completed
Completed

Deal value
($M)
31,595
9,000
4,561
2,065
1,900
1,804

Category
Other
Aircraft & Parts
Other
Other
Other
Aircraft & Parts

Two thousand and fifteen was clearly a record year for M&A value in the Aerospace and Defense
sector. This was led by Berkshire Hathaways announced acquisition of Precision Castparts and
Lockheed Martins completed purchase of Sikorsky. These deals really impacted the total
megadeal value, which increased more than threefold to $50.9 billion in 2015 from $13.9 billion
in 2014. Even though megadeal value did significantly increase, megadeal volume remained flat
compared to 2014.
Activist Investors
Investors within the activist community continue to remain active in the Aerospace and
Defense sector. Many hedge funds have built up significant levels of funding and have been
actively deploying to drive higher returns for shareholders. Investors have been and will
continue to target the A&D sector, as many companies have large cash reserves, non-strategic
segments and/or portfolio gaps and limited to no organic growth opportunities. This has driven
companies within the sector to take a proactive approach to unlocking value to shareholders via
M&A, in efforts to craft their own strategic initiatives before being pressured by an activist
investor with a specific agenda. We feel this theme of activist-driven M&A will only intensify in
2016 as more companies are going to be faced with these challenge in a sluggish global economy
where shareholders continue to demand higher returns.

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Methodology
Mission control is an analysis of mergers and acquisitions in the global aerospace and defense industry. Information was
sourced from Thomson Reuters and includes deals for which targets or acquirers have primary SIC codes that fall into one of
the following SIC industry groups: 1) ordnance and accessories, except vehicles and guided missiles; 2) aircraft and parts; 3)
national security; 4) guided missiles, space vehicles, and parts; 5) search, detection, navigation, guidance, aeronautical and
nautical systems, and instruments and equipment (SDNGN & NS, I&E); and 6) space research and technology.
This analysis includes all individual mergers and acquisitions for disclosed or undisclosed values, leveraged buyouts,
privatizations, minority stake purchases, and acquisitions of remaining interest announced between January 1, 2006 and
December 31, 2015, with a deal status of completed, intended, partially completed, pending, pending regulatory approval,
unconditional (i.e., initial conditions set forth by the acquirer have been met but deal has not been completed), or withdrawn.
The term deals, when referenced herein, is used interchangeably with transactions and announcements. Unless otherwise
noted, the term deals refers to all deals with a disclosed value of at least $50 million.

Regional categories used in this report approximate United Nations (UN) Regional Groups as determined by the UN Statistics
Division, with the exception of the North America region (includes North America and Latin and Caribbean UN groups), the
Asia and Oceania region (includes Asia and Oceania UN groups), and Europe (divided into United Kingdom, plus Eurozone
and Europe ex-UK and Eurozone regions). The Eurozone includes Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.
Oceania includes Australia, New Zealand, Melanesia, Micronesia, and Polynesia. Overseas territories were included in the
region of the parent country. China, when referenced separately, includes Hong Kong.

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10

Resources
PwC Aerospace and Defense practice
Imagine the power of 180,000 people with a common purpose - building
relationships that create value for you and your business. This is PwC. Every day,
our people work with clients in the A&D industry to build the value they are
looking for.
Our A&D practice is a global network of over 1,000 professionals who focus on
providing audit and assurance, tax and consulting services to many of the worlds
most successful companies. We leverage our diverse knowledge, experience, and
solutions to help A&D companies meet the challenges and opportunities of doing
business in the US market, and beyond.
PwCs Deals practice, with approximately 6,500 dedicated deal professionals
worldwide, has the experience to advise you on all factors that could affect a
transaction, including market, financial accounting, tax, human resources,
operating, information technology, and supply chain considerations. Teamed with
our A&D practice, our deal professionals can bring a unique perspective to your
transaction, addressing it from a technical as well as an industry point of view.
PwC US
US Aerospace and Defense Leader
Chuck Marx+1.602.364.8161
charles.a.marx@pwc.com
US Aerospace and Defense Advisory Leader
Randy Starr+1.973.410.7604
randy.starr@pwc.com
US Aerospace and Defense Assurance Leader
Scott Thompson+1.703.918.1976
scott.thompson@pwc.com
US Aerospace and Defense Tax Leader
James Grow+1.703.918.3458
james.b.grow@pwc.com
US Aerospace and Defense Deals Leader
Bob Long+1.703.918.3025
bob.long@pwc.com
US Aerospace and Defense Deals Director
Dale McDowell+1.703.918.4475
dale.a.mcdowell@pwc.com
US Aerospace and Defense Corporate
Finance Director
Robert Ashcroft+1.312.298.2364
r.ashcroft@pwc.com

US Aerospace and Defense Marketing Manager


Gina Reynolds+1.973.236.4648
gina.reynolds@pwc.com
US Aerospace and Defense Research Analyst
Alexander Bosco704.434.7754
alexander.bosco@pwc.com
PwC Global
Brazil Aerospace and Defense Leader
Augusto Assuncao+55.19.3794.5408
augusto.assuncao@br.pwc.com
Canada Aerospace and Defense Leader
Mario Longpre+1.514.205.5065
mario.longpre@ca.pwc.com
China Aerospace and Defense Leader
Huw Andrews+86.21.2323.8800
huw.andrews@cn.pwc.com

Germany Aerospace and Defense Leader


Martin Theben+49.201.438.1524
martin.theben@de.pwc.com
India Aerospace and Defense Leader
Dhiraj Mathur+91.11.4115.0309
dhiraj.mathur@in.pwc.com
Italy Aerospace and Defense Leader
Corrado Testori+939.06.5702.52442
corrado.testori@it.pwc.com
Middle East Aerospace and Defense Leader
Masood Hassan+971.4.304.3314
masood.hassan@ae.pwc.com
UK Aerosapce and Defense Leader
Dean Gilmore+44.20.721.35699
dean.gilmore@uk.pwc.com

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