Aerospace, Defense & Government M&A Outlook: May 2024
Strong fundamentals and a favorable macro-outlook continue to draw attention and capital into the Aerospace, Defense, and Government Services (ADGS) sectors, according to a new industry report released by the ADGS investment banking team from BGL.
The following is an excerpt from the full 27-page report that is available as a free download: https://info.bglco.com/industrials-aerospace-defense-government-services-insider-may2024.
Aerospace, Defense & Government M&A Highlights
M&A activity stabilized in 2023, supported by a sizable uptick in the fourth quarter (+24%), with both Defense and Government Services registering strong deal volume. This momentum is continuing into 2024, evidenced by a 33% increase in transaction volume in Q1 2024. We are anticipating overall deal activity to increase in 2024 due to increasing geopolitical tensions, proliferation of technology advancements in quality assets, and potential interest rate cuts further boosting recovering levels of M&A activity. The announcement of large-scale transactions in the first quarter, such as the take private of Kaman by Arcline Investment Management completed in April ($1.9 billion), is a strong indicator of investor appetite for the sector.
While EBITDA multiples have contracted in Q1 2024, we expect business valuations to remain stable through the
remainder of 2024.
Private Equity in the Aerospace, Defense & Government Industry by the Numbers
Strong fundamentals and a favorable macro outlook continue to draw private equity (PE) funds to the sector. Despite slight declines in 2022 and 2023, fund returns have steadily increased since the 8.8% recorded in 2010.
Add-on acquisitions represent a large and growing percentage of PE transactions, particularly in recent years, reaching a high of 80% in 2023. The middle market is highly fragmented and ripe for consolidation, with funds actively seeking opportunities to pursue buy-and-build strategies.
Consistent with the broader market, 2022 and 2023 represented slower M&A years due in large part to macroeconomic uncertainty and the high interest rate environment which disrupted liquidity in the credit markets, making smaller add-on acquisitions easier to finance.
Government Services M&A Activity Dominates the Sector
Government Services sector M&A remains highly fragmented, with private equity and specialized contractors leading the consolidation and seeking acquisitions that tap into high-growth markets and advanced technological capabilities. The focus on high-tech and next-generation capabilities persists, with the M&A landscape increasingly favoring suppliers with greater exposure to the defense sector as geopolitical tensions drive increases in defense budgets. IT modernization and cybersecurity are among the areas seeing high prioritization for buyers.
Activity within the Government Services sector continued to dominate the industry in terms of deal count, with Government Services transactions representing 45% of all U.S. transactions in 2023. The number of transactions in 2023 relating to cybersecurity, intelligence, and software accounted for 47% of deal activity.
The above was just a brief excerpt from the full report. You can download the full 27-page Industrials Insider to uncover additional insights on the global air traffic recovery, the record-high commercial aircraft backlog, and the increasing demand for maintenance, repair, and overhaul (MRO) services driven by aging fleets and supply chain challenges.
Contact our Aerospace, Defense & Government Services Investment Banking Team. Led by William F. Farmer, BGL’s ADGS investment banking team advises middle market companies across the aerospace, defense, and government services industry. Please reach out via our our contact form below to start a conversation today.