OREANDA-NEWS. September 29, 2010. Merger and acquisition (M&A) deal activity in the aerospace and defense (A&D) sector was relatively sluggish in Q2 2010, according to the PricewaterhouseCoopers LLP report, Mission control: Second-quarter 2010 global aerospace and defense industry mergers and acquisitions analysis. In Q2 2010, the A&D sector saw significant activity in the middle-market and large deal segments of the market, however, mega deal activity was nonexistent during the quarter, reported the press-centre of PwC.

While the pace of deal activity in the A&D sector, as measured by the volume and value of transactions, remains above the recession lows of Q1 2009, the overall deal market recovery took a relative pause in Q2 2010.  During the quarter, there were seven announced deals worth USD50 million or more, compared to the eight deals reported in Q1 2010.  Additionally, the total value for announced deals in Q2 was USD 2.2 billion, a significant decline from the USD 5 billion in total deal value from the first quarter of this year.

Michael Knoll, partner, head of M&A lead advisory / corporate finance, PricewaterhouseCoopers in Russia, said:

"The M&A deal environment within the aerospace and defense sector experienced a loss of momentum during Q2, but we expect a gradual increase in activity throughout the rest of this year. Lots of cash, improved capital markets and a recovery in the global economy will likely help drive overall deal totals in the sector, which makes us cautiously optimistic as we look ahead to the second half of 2010."

Despite the decline in deal activity, one noteworthy trend was the reemergence of U.S. entities, which became more active in the deal market during Q2 2010 compared with 2009 and Q1 2010 when measured by their relative participation in announced deal volume and value.  The increased involvement from U.S. entities may be attributed in part to the release of the U.S. Quadrennial Defense Review, which is eliminating some of the uncertainty surrounding upcoming defense spending priorities.

In Q2 2010, average deal values edged downward compared to the previous quarter and full year 2009, primarily due to the absence of mega-deals (deals with a disclosed value of at least USD 1 billion). This represents a decline when compared to the two mega-deals announced in the first quarter of 2010 and full year 2009.  Despite the drop in mega-deals, the pace of activity in large and middle-market deals is similar to Q1 2010 and 2009, however; the majority of deals were those with undisclosed values or those with  disclosed values under USD 50 million.

Additionally, the absence of activity by financial acquirers during the second quarter is notable and represents a departure from their relative level of activity in 2009 when they accounted for nearly 11 percent of deals worth USD 50 million or more and in Q1 2010 when they accounted for 20 percent of deals.  Looking ahead to the second half of 2010, strategic acquirers will likely continue to dominate deal-making with intermittent increases in financial investment.

From a regional perspective, the distribution of deals by target region indicates that the relative number of deals for targets in the Asia and Oceania region has declined over time in favor of deals targeting North American entities.  This trend is associated with the resurgence of deals involving U.S. entities.  Specifically, of the seven deals worth USD 50 million or more announced during Q2 2010, five involved U.S. acquirers and four involved U.S. targets.

John Campbell, Industrial Products Industry Leader for Central and Eastern Europe, PricewaterhouseCoopers in Russia, noted:

"Clearly, last year was a challenging year for the global aerospace industry with reduced passenger and air freight demand leading to a dramatic decline in new aircraft orders as airlines looked to preserve cash. These factors, combined with cost overruns in both military and commercial programmes, has meant the impact on revenues has been quite dramatic - this is the first decline in profits we have seen in five years.

However, as global economies recover, we expect to see a return to airline demand growth. Globalisation is driving growth in the aerospace and defence industry and as these companies expand their global footprints, a race to capitalise on rising opportunities has begun. The companies that win the race will be those who are able to overcome the new competitive threats and complex operational challenges that doing business on a global scale presents."