Private equity firms target small, frequent acquisitions giving better profit margins
Another wave of European aerospace mergers is imminent after activity dropped off in the wake of the consolidation binge of the late 1990s, according to a report from aerospace consultancy High Strategy. This could be good news for the industry, as high levels of acquisition activity often mean good profit margins, the report says. In particular, European private equity companies are expected to expand their role, as US rivals such as the Carlyle Group pull back.
Conventional wisdom is that large acquisitions tend to hurt profitability, at least in the short term, as a company struggles to assimilate a new purchase, but this is not true in aerospace, says High Strategy director Antoine G‚lain. Acquisitive companies like L-3 Communications in the USA and Smiths in Europe, which have grown significantly through takeovers, have generally shown better average operating profits than slower-growing companies such as Goodrich and Honeywell, where divestments have almost matched acquisitions and whose revenues have not increased as much over the last five years. Gélain says: "Small, frequent acquisitions make a lot of sense - when the acquisition is relatively large it is usually difficult to obtain the expected benefits."
Early efforts by US equity players to enter the European market saw Kohlberg Kravis &Roberts (KKR) buying MTU and Carlyle Group buying into FiatAvio (now Avio) and Qinetiq. But US private equity houses are now believed to be wary of taking on more European aerospace and defence companies, after strong opposition from governments worried about companies falling into foreign hands.
This should mean more room for European-based equity, such as 3i (owner of SR Technics) and Doughty Hanson (owner of Saft and Dunlop Standard Aerospace).
ALEXANDER CAMPBELL / LONDON
Source: Flight International
