Heading into the new year, all signs were pointing toward 2019 being the year of the merger. Then a government shutdown landed like a meteor, leaving some contractors unable to do such basic things as get export licenses or… get paid. Presently, the government is on life support with yet another shutdown deadline in February, and little visible movement toward any agreement on a border wall between the president and congress. Despite the uncertainty, however, there are a few good reasons to believe that the year ahead will see major mergers announced, completed, or bearing fruit. The motivating force behind a continued positive outlook for defense and aerospace mergers and acquisitions? A five percent boost in defense spending in 2020. There are some big contracts out there for the taking, and you need a big company to take them.
The year opened with Parsons Corporation announcing the acquisition of OGSystems. Parsons is a defense and infrastructure company based in Pasadena, CA. OGSystems focuses primarily on geospatial intelligence and big data analysis. Three days later, aerospace and defense giant Textron Systems announced that it will acquire Howe and Howe Technologies, which develops armored military vehicles (including the Ripsaw luxury tank). Meanwhile, the shutdown overshadowed the long-announced purchase of Engility Holdings by SAIC, IT contractors both. Because the fiscal year of SAIC ends at the end of January, a failure by the government to pay its bills proved a headache for the company, though the acquisition was successful.
When Uncle Sam Stops Paying His Bills
That would be quite a start to any year, but the government shutdown muddied the waters. Its damaging effects are yet to be measured fully. Last week, the Aerospace Industries Association issued a press release reminding lawmakers that unlike civil servants, contractors will not be receiving back pay, and that many smaller government contractors had to layoff employees as a result of the political deadlock. Moreover, some companies have had to reassign key staff from mission critical government projects to more “reliable” work. (Jim Bridenstine, the administrator of NASA, warned that the agency will be feeling the effects of the shutdown for a very long time because of this.) David Berteau, president of the Professional Services Council, estimated the number of contractors affected overall to be in the tens of thousands.
Though this isn’t likely enough to derail ongoing industry acquisitions, it has certainly left the defense workforce in a state less healthy than it might otherwise would have been. The real damage to defense workers might come long after the shutdown is forgotten by the general public. Seventy-eight percent of Americans live paycheck to paycheck. Beyond the immediate financial toll (e.g., paying mortgages and credit cards on time), a lot of workers just took a long-term beating by way of security clearances. Six defense industry associations signed a letter asking the Office of Personnel Management to “forgive” debt problems that occurred as a result of the shutdown—problems that will inevitably reappear during clearance investigations and renewals. The OPM has yet to commit either way. And the prospect of a repeat in February, and then again in 2020, doesn’t help recruitment and retention of top technology talents.
Defense Spending Set to Rise
This year, Harris Corp and L3 Technologies will make its merger official, having explored the possibility for some time. This will be the biggest defense merger in history, worth $33.5 billion, and should be completed by midyear. Christopher Kubasik, the hard-charging president and CEO of L3 Technologies, made headlines last year when he vowed to make his company the “sixth prime”(i.e.: the sixth-largest prime contractor). The merger with Harris Corp, should everything come up aces, will, in fact, make that a reality. The combined companies will become the seventh-largest defense outfit in the world, and will be based out of Melbourne, FL.
Meanwhile in aerospace, Boeing is attempting to finalize a merger this year with Brazil-based Embraer, an aircraft conglomerate (in whose planes you have almost certainly flown). The Brazilian government has approved the merger; shareholders will cast the final vote.
But what is driving merger mania? The same thing that threatens it: the current White House. Plainly stated, the president seems to like big defense budgets, asking for an eye-popping $750 billion for the Defense Department in 2020. Companies are merging so that they can bid for bigger projects. This is about future growth. The Pentagon is pivoting away from counter-terrorism (as we have seen with its downsizing of U.S. Africa Command), and toward conventional military supremacy versus Russia and China. The battlefield it is planning for is “peer-to-peer,” with lots and lots of expensive hardware in play. And the Pentagon has shown little of the Obama administration’s reticence toward defense mergers and acquisitions. (ClearanceJobs has a guide for how you can make the most of things during an acquisition.)
Still, nobody knows how long this will last. (I tried to pin down six separate defense analysts and nobody wanted to go on the record either way until numbers could be crunched with respect to the economic impact of the shutdown.) Will 2019 be the year of the merger? That might depend on who is president in 2020.