sector mergers and acquisitions appear poised to keep pace in 2019, with two major deals announced during the past week.
Mergers and acquisitions in the defense contracting sector appear poised to keep pace in 2019, with two major deals announced in the past week.
California-based defense contractor Parsons announced Jan. 7 that it would buy Virginia-based government contractor OGSystems for an undisclosed sum. On Thursday, the hardware manufacturer Textron Systems announced its purchase of Howe and Howe Technologies, a Maine-based manufacturer of robotic military vehicles.
Both acquisitions follow two years of modest increases in U.S. defense spending under a Republican-controlled White House and Congress. The Pentagon has said in official strategy documents that it would de-emphasize counterterrorism in favor of competing with China and Russia for global military dominance, stepping up new weapons production efforts in areas such as artificial intelligence and hypersonic weaponry.
Defense contractors have pivoted their business accordingly. Textron Systems Senior Vice President Ryan Hazlett said the Pentagon’s shift in focus has encouraged his company to invest in the market for ground-based robotics.
“We have seen over really the past 18 to 24 months a pretty significant change in the geopolitical environment in the world today, as well [within the Defense Department] a change from a counterinsurgency strategy to really more of a focus on peer-topeer conflict,” Hazlett said. “When we looked at our business and how to position ourselves to assist our U.S. military customer, we identified a gap. . . . Before this we really haven’t had an opportunity to expand into the robotic ground market.”
Textron gets access to robotic ground vehicles the Army is interested in. Howe and Howe makes a tracked robotic load-carrying vehicle called the IMET, designed to drive alongside deployed Army platoons and carry heavy materials.
The company’s robots also can be used for more peaceful endeavors. It makes a robotic firefighting vehicle called the Thermite RS1-3 that is designed for industrial fires and those involving hazardous materials, which might be especially dangerous for human first responders.
In buying OG Systems, Parsons hoped to benefit from its expertise in areas including geospatial intelligence. Both companies help U.S. defense and intelligence agencies with complex data and cybersecurity work.
The two recent mergers are the latest example of growing consolidation in the defense contracting industry.
In 2017, Northrop Grumman bought Orbital ATK, a Dulles, Va.-based contractor focused on the defense and space industries, for $7.8 billion. United Technologies bought the aircraft parts manufacturer Rockwell Collins for $30 billion.
Last year, General Dynamics bought midsize IT contractor CSRA for $9.7 billion, and Restonbased Science Applications International engineered a $2.5 billion deal with the IT contractor Engility. In October, L3 Technologies and Harris unveiled plans to merge in a colossal $33.5 billion deal, thought to be among the largest for the sector.
Bob Kipps, managing director of the aerospace and defense-focused investment bank KippsDeSanto, said he expects to see even more market activity in the next year. In a survey of executives in the aerospace and defense sector by KippsDeSanto, more than 75 percent of respondents thought merger-and-acquisition activity would stay the same or increase in the next year.
“We’re extremely bullish on 2019,” Kipps said. “We really think it will be a record year.”