Recent years in aerospace and defence (A&D) have been tumultuous. The sector experienced unprecedented challenges due to the Covid pandemic and then has had to react to the escalation of the wars in Israel and the Ukraine. However, the sectors response to these events has been remarkably positive and, as a result, mergers and acquisitions (M&A) in the sector are a key priority.

Overall, M&A activity in A&D is driven by a number of key factors including digital transformation, geopolitics, an increased focused on national security and the increased oversight from national Governments in terms of protecting national interests. Meanwhile, civilian aerospace manufacturers are reacting to the increased demand for travel.

There are number of key areas of focus for those that wish to participate in future M&A activity in the A&D sector. These include the fundamentally crucial areas of cybersecurity, detection, electronics, hypersonics, navigation, simulation and software. Meanwhile, there remains a robust opportunity in the field of aftermarket maintenance and repair. At the same time, there is a significantly growing opportunity in space, due to so many geopolitical and national security pressures, with space being seen as the next frontier in modern warfare.

Other concepts driving M&A activity include the need for supply chain sustainability, as ESG issues come to the fore. At the same time, large A&D groups are looking for other ways to drive growth and add technological capabilities including through alliances, joint-ventures and partnerships.

There are a number of clear drivers boosting the A&D sector:

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• The aerospace segment is growing thanks to increasing urbanisation across the world, increasing air traffic, the number of new airports, the increasing demand for private jets and helicopters and the overall rising number of aircraft required.

• The defence segment has been boosted increased defence budgets, the strengthening of military capabilities and increased war-level tensions in different parts of the world.

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M&A activity in the A&D sector is largely being driven by the need for players to drive their growth, enhance their product capabilities and improve their market positions. In this regard, strategic buyers have a unique opportunity give their access to capital, which differentiates them from smaller companies, which have less access to private capital to finance their growth. It is also highly likely that many major groups in A&D will look to acquire start-ups or business segments of other groups in order to penetrate new market segments and achieve growth. As such, many of these groups will be seeking to fill gaps in their product or service offerings.

In terms of the geographical focus for M&A, these is a growing likelihood of more cross-border deals, as A&D companies seek to increase their access to new channels and customers.

Meanwhile, private equity investors will continue to play a key role in M&A in the A&D sector. They are able to facilitate the strategic combination of important smaller and mid-sized players. They can thus create new substantial players with competitive advantages, which will then be ultimately be acquired by the large groups. There are around 100 of these platforms in existence in the A&D sector, with many of these investments due to come to the end of their private equity investment cycles.

In terms of valuations in the aerospace and defence sector, the range of multiples paid for businesses can vary from anything between 7x and 12x EBITDA. Significantly, any players in the attractive growth segments of automation, digitalisation and electronics can attract valuations at multiples at much more than this.

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Constantine Biller is a Partner at Shaw & Co

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