On Monday, UK defence company BAE Systems announced two acquisitions worth $2.2 billion in the US.
It will pay Collins Aerospace $1.925 billion for its military global positioning system (GPS) assets and Raytheon $275 million for its airborne tactical radios business.
For M&A bankers in Europe, it’s a promising start to the year that recalls BAE’s acquisition spree in the early 2000s when it established itself as a force in the US. It acquired Lockheed Martin’s aerospace electronics systems for $1.67 billion in 2000 and then United Defense Industries for $4.2 billion in 2005, as well as a host of smaller bolt-ons.
The firm hasn’t done a deal of this size since the financial crisis. Bankers say BAE Systems has restored its financial strength and was ready and eager to pounce when these disposals came up and was therefore able to beat potential US rival bidders.
Bankers were pleased to see the BAE Systems share price rise on the day of announcement, saying this is a signal that European companies seeking growth through outbound M&A may be supported by shareholders.
Global M&A revenues fell 10% last year, according to Dealogic, and there was a sharp disparity between the US, where revenues fell by just 8%, and Europe where they declined by 18%. The difference was in mega deals. There were 46 M&A transactions of above $10 billion in the US in 2019; Europe saw just five.
Could a revival be at hand?
Optimistic M&A bankers suggest volumes could be 5% higher in Europe this year and hope the two big drivers will be a revival of large deals in Europe and more cross-border M&A as European companies seek to acquire growth in the US.
However, while financial conditions remain easy for raising cheap M&A funding, the latest PwC CEO confidence survey published in January – based on responses from CEOs in September and October last year – shows unprecedented pessimism about the global economy, with a majority now expecting the rate of growth to decline in 2020.
Time will tell if dealmakers really are risk-on this year.
It’s hard to be optimistic about Europe. The two acquisitions BAE Systems just announced are the by-product of forced disposals required by US regulators to give antitrust clearance to the $120 billion proposed combination of Raytheon and United Technologies announced in June.
Now that is a transformational deal. It will create the world’s second-largest defence contractor after Lockheed Martin. BAE Systems is just picking up some crumbs.
European companies need to consolidate at home first, through intra-European deals.
This is especially so in industries such as banking, where national champions have hit the limit of cost cutting on their own and now risk not being able to compete with the American winners in their own markets, never mind in the rest of the world.