The pool of mid-tier US defence contractors specialising in surveillance and intelligence equipment has been consolidating - and looks set to shrink even further by the end of January.

Raytheon signed a merger agreement with Applied Signal Technology on 20 December. Ten days later, the company launched a one-month tender to buy all the outstanding shares of Applied Signal for $38 each. The tender, valued at $490 million, closes on 28 January.

The merger agreement was signed just four months after Boeing closed a $775 million deal for Argon ST, a rival of Applied Signal in the market for intelligence, surveillance and reconnaissance (ISR) and cyber technology. Elsewhere, ICX Technologies, a sensor manufacturer, agreed in August to be acquired by FLIR Systems.


Other medium-sized defence electronics companies, meanwhile, have seen their stock prices soar as the sector becomes an acquisition target. For example, since August, Mercury Computer Systems' stock has been trading at five-year highs.

Interest in the sector reflects US defence contractors' desire to push heavily into one of the few growth markets remaining in the weapons business.

 © US Air Force
ISR capabilities like those of the MC-12W are in demand

US defence budgets are projected to be squeezed by rising personnel and operations costs over the next decade. In recent months, the Department of Defense has unveiled an efficiencies initiative, which is expected to fall hardest on major platform programmes, such aircraft and ships, and suppliers of military services.

However, the demand for ISR and cyber technology has grown steadily during the past decade and is expected to continue improving. Signs of this shift in defence department priorities may already be apparent. During 2010, only one contract was awarded by a new programme of record introducing a manned military aircraft.

That contract was awarded to a Boeing/Argon ST team for the enhanced medium-altitude reconnaissance and surveillance system (EMARSS), which modifies a Beechcraft King Air 350ER with a signals intelligence (SIGINT) mission suite.

EMARSS reflects rising demand for manned and unmanned aircraft equipped with cameras and antennas that can intercept or jam electronic signals.


Companies such as Argon ST and Applied Signal, with products aimed at rising airborne ISR programmes such as the US Air Force MC-12W Liberty (pictured above, also based on the Beechcraft King Air 350), swiftly became acquisition targets.

Last January, Argon ST formally notified investors that it would consider bids to merge or be acquired by another company. In October, Applied Signal issued a similar notice.

Bill Van Vleet, president, chairman and chief executive of Applied Signal, described how his company fits the new paradigm in US defence spending.

"We believe that Applied Signal is one of a small number of companies that are building foundational competitive and partnership positions in what will become a very large and permanent extension of the intelligence and defence markets," Van Vleet said during a teleconference call with market analysts on 30 August.

Even then, it was clear that Applied Signal's executives had taken notice of Boeing's recently completed acquisition of its competitor, Argon.

At the time, said Van Vleet, the company believed its products would be in greater demand from Boeing's competitors at the highest levels of the defence industry.

"We do believe the acquisition of Argon by Boeing creates additional opportunity in the market for us to provide our capabilities and solutions to the other industry prime contractors that previously relied on Argon for technology," said Van Vleet, naming Northrop Grumman, Lockheed Martin, L-3 Communications, BAE Systems, Raytheon and General Dynamics as examples.

He added: "We think it does create some space, and we've actually had a fair amount of increased discussion with some of the other larger primes in terms of seeing if there would be some interest in leveraging some of our technology to fill what is essentially now a hole in their competitive matrix."

Source: Flight International