The Aerospace&Defence industry had modest headlines in 2015 even if it has doubled its volume from 2014. The bigger news took place after the second quarter close, with Lockheed Martin’s announced acquisition of the Sikorsky helicopter unit from United Technologies. The deal, valued at $9 billion, is the largest transaction in the A&D sector since United Technologies’ acquisition of Goodrich in 2011. With $24 billion in announced deals, 2015 totals were well above the $12 billion total deal value captured in 2014 but in line with the equivalent quarter of the prior year. The number of transactions is now 101, a number similar to the previous year that closed with 130 deals and a little bit more than 2013 that closed at 108.
A&D companies are actively splitting public sector and commercial units and divesting lower margin businesses, such as IT services. The primes are consolidating or broadening leading positions in segments, allowing for focus on platforms. Restructuring, divestitures, and spin-offs also remain popular among A&D companies and diversified industrials. Companies are optimizing portfolios to simplify operating models, align with core capabilities, or to enter faster-growing markets. Commercial market exposure and specialty technology are among the two highest priority themes driving deal activity among defense contractors.
High-growth markets, including cybersecurity, electronic warfare, and UAVs continue to see strong deal activity. The market is still dominated by the two aerospace giants, Airbus, and Boeing, but the ability to get into space and to reduce costs to do so is opening new scenarios to the companies that are actively researching in the sector. Know how from little companies and big capitals from big firms interested in having access to space are reshaping the industry scenario. Notwithstanding near-term bullish forecasts, the A&D industry is undergoing significant structural change.
As previously stated the most relevant deal is represented by the announced acquisition of Sikorsky by Lockheed Martin.
Lockheed
Overview
Formed by the merger of Lockheed Corporation with Martin Marietta in March 1995, Lockheed Martin is a global security, aerospace, and information technology company employing 112,000 people worldwide.
The majority of Lockheed Martin’s business, counting $46 billion of annual revenues, is with the U.S. Department of Defense and the U.S. federal government, weighting for more than 80% of global sales, while the remaining portion of its business is comprised of international government and some commercial sales.
Lockheed Martin’s operating units are organized into broad business areas.
- Aeronautics, with almost $15 billion in 2014 sales, which incorporates tactical aircraft, airlift, and aeronautical research.
- Information Systems & Global Solutions, with around $8 billion in 2014 sales, involving government and commercial IT solutions.
- Missiles and Fire Control, with nearly $8 billion in 2014 sales.
- Mission Systems and Training with roughly $7 billion in 2014 sales, which includes naval systems, simulation, and training.
- Space Systems, with $8 billion in 2014 sales, comprising space launch, commercial and government satellites.
The acquired company Sikorsky, one of the leading helicopter manufacturers, was founded in 1925 by aircraft engineer Igor Sikorsky. In 1929, the company moved to the Connecticut in the US, becoming a part of United Technologies Corporation (UTC by now) in July of that year.
In 2015, UTC considered Sikorsky to be less profitable than the other subsidiaries and analyzed a possible spin-off. The Sikorsky business, which had been part of UTC for decades, reported net sales of $7.5 billion in 2014 and employed more than 15,000 people. Projected Sikorsky production is around 1,600 military helicopters between 2015 and 2029, for a market share of almost 20%, second only to Russian Helicopters.
Terms and Structure
Lockheed Martin (NYSE: LMT) has entered into a definitive agreement to acquire Sikorsky Aircraft, a world leader in military and commercial rotary-wing aircraft, for $9.0 billion. The price is reduced to approximately $7.1 billion, after taking into account tax benefits resulting from the transaction. Lockheed Martin and UTC have agreed to make a joint election under Section 338(h)(10) of the Internal Revenue Code, which treats the transaction as an asset purchase for tax purposes. The election generates a tax benefit with an estimated present value of $1.9 billion for Lockheed Martin and its shareholders.
Some industry observers raised concerns that by acquiring the biggest American helicopter manufacturer, Lockheed, already the world’s largest defense contractor and a principal integrator of helicopter systems, could conflict with antitrust strictures against too much vertical and horizontal integration.
The acquisition is subject to customary conditions, including securing regulatory approvals, and it is expected to close in late fourth quarter 2015 or early first quarter 2016.
It will be Lockheed’s biggest acquisition since 1996 when it bought Loral Corporation for $9.1 billion, and the payment will be entirely by cash.
Drivers of the Deal
“Sikorsky is a natural fit for Lockheed Martin and complements our broad portfolio of world-class aerospace and defense products and technologies,” said Marillyn Hewson, Lockheed Martin chairman, president, and CEO. “I am confident this acquisition will help us extend our core business into the growing areas of helicopter production and sustainment.”
On a call with investors last week, Gregory Hayes, CEO of Sikorsky parent company UTC, said valuations put Sikorsky’s worth at $5 billion, and he supposed he could sell it for $6 billion. Even with $1.9 billion in tax benefit, Lockheed is inclined to pay $7.1 billion to the helicopter producer.
This does not necessarily imply Lockheed is overpaying. The company acknowledges additional revenue that can obtain from some specifics synergies by leveraging different systems on their platforms, or logistics or services work on their platforms, and that would increase the revenue effect of controlling Sikorsky.
Separately, Lockheed Martin will handle a strategic review of alternatives for its government IT and technical services businesses, primarily in the Information Systems & Global Solutions business segment and a portion of the Missiles and Fire Control business segment. The programs to be reconsidered represent roughly $6 billion in estimated 2015 annual sales and more than 17,000 employees.
The IS&GS programs that are not included in the strategic review are principally concentrated on defense and intelligence customers and will be realigned into the Corporation’s other four business divisions following conclusion of the review.
Credit Suisse is serving Lockheed as financial advisor while JP Morgan is following United Technologies.
Conclusions
The outlook for M&A in the A&D sector looks to improve on optimism regarding commercial aerospace, as well as more aggressive portfolio management activity by defence contractors. High valuations and an uncertain budget outlook have prompted companies to reconsider their long-term growth potential and actively manage their business portfolios. This has led to a high rate of divestitures among defence companies and strategic acquisitions in high-growth, specialty areas with diversified revenue sources.
| Bank | Position | Market Share | Value of Deals | Value per Deal | Number of Deals |
| JP Morgan | 1 | 56 % | $14b | $4.7b | 3 |
| Credit Suisse | 2 | 36 % | $9b | $9b | 1 |
| Morgan Stanley | 3 | 19 % | $4.7b | $4.7b | 1 |
| CITIC Securities Co Ltd | 4 | 3 % | $0.9b | $0.9b | 1 |
| Moelis & Co | 5 | 3 % | $0.76b | $0.15b | 5 |
| Citi | 6 | 2 % | $0.7b | $0.36b | 2 |
| Lazard Ltd | 7 | 2 % | $0.5b | $0.5b | 1 |
| PNC Financial Services Group Inc | 8 | 2 % | $0.49b | $0.49b | 1 |
| Societe Generale | 9 | 1 % | $0.2b | $0.1b | 2 |
| Catalyst Corporate Finance Ltd | 10 | 1 % | $0.2b | $0.2b | 1 |
To contact the authors:
Davide Magni davide.magni@studbocconi.it
Giuseppe Scavolo giuseppe.scavolo@studbocconi.it
Andrea Stragiotti andrea.stragiotti@studbocconi.it
Bocconi Students M&A Circle 
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