Tough times in aerospace will not dim prospects for investment banking specialists
Gloom and doom is not just fashionable in aerospace these days - with a credit crisis, general downturn and rocketing fuel prices a cloudy outlook seems entirely rational. But from the perspective of some investment bankers, times are good.
At the Farnborough air show three of the deal makers behind the mergers and acquisitions market were in a sanguine, even upbeat, mood, in contrast to the oil price-obsessed anxiety that otherwise hung over the fair.
According to Paul Edwards, the London-based managing director of Jefferies Quarterdeck, the aerospace and defence group at Jefferies investment bank, despite the current economic climate there is still a strong deal flow and a buoyant mergers and acquisitions market characterised by many willing buyers and sellers, as opposed to distress sales.
Michael Richter and William Farmer, co-heads of the aerospace and defence advisory group at Lazard and once of Jefferies, concur. "I would say M&A activity is still very strong - notwithstanding the problems the industry is facing," says Richter.
There are many reasons for this positive situation, says Edwards. For buyers, acquisition remains a way to gain access to programmes, markets and technologies. US companies buying into Europe and the UK are still commonplace, and, increasingly, Europeans are buying into the USA.
Some of that westbound transatlantic traffic is about eurozone producers looking for a US cost base to hedge their revenues against the falling value of the dollar. But, notes Lazard's Farmer, the soaring value of the euro is now a factor: "I would say that a lot of foreign firms have been reluctant to buy US assets simply because of regulatory hurdles and prices and valuations being very high.
"Now you have lower prices and, with the currency, European players are much more competitive. It makes having to put up with a lot of regulatory hurdles easier to deal with."
For sellers, says Edwards, business is strong so now is a good time to sell up.
That motivation is particularly strong for companies in the supply chain that have been successful, but have got to a point in their development where they must ask, as Edwards puts it: "Am I big enough to be a consolidator or should I sell out?"
Companies facing that question are not just deciding whether they have the financial resources to stay ahead of their competitors. They must also respond to their customers' desire to deal with fewer, larger suppliers. Moves by Airbus and Boeing to globalise their supply chains are expected to keep a fire lit under mergers and acquisitions activity.
Another driver of consolidation is the advent of new technologies. The USA's new homeland security market is one good example and unmanned aircraft is another.
A good example of all these drivers can be found in Boeing's acquisition of Insitu (Flight International, 29 July-4 August). For Boeing the acquisition is a way to greatly expand its toehold in the military and civil UAV markets Insitu's venture capital backers had decided the time was right to put the company up for sale.
In defence, Finmeccanica's pursuit of DRS may be indicative of a trend among Europeans pursuing access to US defence contracts. The pursuit may also indicate shifting sands in the political arena. "It's become more of a global industry, with a higher acceptance of foreign companies acquiring domestic players," says Richter.
The mergers and acquisitions market is seeing some changes. Companies are facing severe challenges, so stock market sentiment does not necessarily reflect their underlying prospects.
The credit crunch is also limiting private equity firms' ability to raise capital, so Edwards, Richter and Farmer all expect there to be more open market transactions in place of the private equity deals that have been prominent in recent years.
These three might be expected to talk up the market - after all, investment bankers make their money by doing deals - but the logic is hard to refute. As Edwards puts it, aerospace companies have strong growth prospects and that will change "only if you believe nobody is going to fly any more or world peace is going to break out".