Europeans seem unwilling to invest in home markets as European deals have been notably absent, most likely due to the weak dollar depressing margins and making North American assets cheaper.

Transatlantic deals are back in force with the value of deals rising to $12.6bn in 2007 from $1.9bn in 2006, the highest level we have on record.  The investment in both years continues to be concentrated between the United States and the United Kingdom.

The UK Defence Industrial Strategy of 2005/06 paved the way for more international investment in defence assets and the UK remains the world‘s second largest aerospace industry.  Two of the largest deals in 2007 were therefore US/UK: GE‘s $4.8bn acquisition of Smiths Aerospace and JLL Partners’ $0.9bn acquisition of McKechnie Aerospace.

Another feature of M&A activity over the last two years has been the emergence of Middle-Eastern investors: 2006 and 2007 saw the acquisition of Doncasters and SRTechnics in competitive auctions from private equity owners.

Private equity participation in the sector continues to rise and average deal size has grown from a low of $100m in 2003 to $280m in 2007, reflecting the more strategic nature of deals, improved profits and higher multiples.  The credit crunch has put a temporary brake on private equity’s ability to play in the large deal market, but we continue to see plenty of activity in the mid-market.

In defence, several major programmes in the US and Europe are in the ‘ramp up’ phase of production and ongoing military commitments in Iraq and Afghanistan are supporting high demand for spares and overhaul.

The geographic investment profile seen in previous years was much more balanced compared to three quarters of the $32.9bn invested in 2007, concentrated on North America and only a quarter in Europe. This points to a weaker M&A market in Europe and the strongest year in North America since 2000.

Of the 43 deals announced in the rest of the world in 2007, 25 represented investments in Brazil, Russia, India and China (the ‘BRIC’ countries).  Due to its growing budget and increasingly favourable environment towards foreign ownership, India is the country to watch.

Dhiraj Mathur, executive director, PricewaterhouseCoopers, commented: 

“India is poised to become one of the most important markets in the Defence Sector, but we must have a coherent policy framework encompassing FDI, licensing and offset policies to capitalize on the manufacturing and technology transfer opportunities presented by a massive defense procurement programme.”

In civil aerospace, backlogs for commercial aircraft reached an all time high in 2007, with Boeing and Airbus having a combined 6,848 aircraft on order by the end of the year. Their combined order intake of 2,754 in 2007, smashed the previous high of 2,057 in 2005.

As a whole, industry profit margins continue to improve showing a consistent upward trend. 

The implications of all this activity will continue to shape the structure of the industry for the next decade.  M&A activity has shifted from Europe to North America and is expected to continue growing.  It is only relatively recently that corporate investors have returned to the market and they need to make up for lost time to position themselves appropriately for the future.

The most promising sign from 2007 is a significant rise in transatlantic M&A, with money flowing equally and in large volumes in both directions, as corporates acquire leadership positions in the key growth sectors of the industry.