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— Analysis —
"The continuing presence of U.S. forces in Iraq and Afghanistan has been very profitable for U.S. defense contractors and I'm sure have made them economically interesting to potential overseas acquirers," says Robert Clifton Burns, partner at Powell Goldstein LLP in Washington. Deals have transpired in spite of regulatory hurdles. Parties typically file for a review by the Committee on Foreign Investment in the United States, an interagency panel that reviews foreign acquisitions of U.S. assets. "There have been a fair number of transactions in the area and people have been able, I think, to handle most of those issues, but they do add a layer of complexity to them," Burns says.
-- Browse other stories in this Middle Market Special Report -- Welcome to purgatory Silver linings Still betting on the banks Damn the CFIUS, full speed ahead Bite size After Dubai, United Arab Emirates-based DP World's attempt to acquire U.S. port facilities was thwarted in 2006, a much more stringent Cfius law passed Congress. Now merged companies that violate conditions imposed by Cfius can see their deals broken up after they've been consummated. And foreign state-controlled purchasers can expect to have longer Cfius reviews. The Treasury Department may draft new rules by November. None of this is dissuading buyers. "People have been willing to endure [Cfius] because the U.S. defense industry market is so large, everybody wants a piece of it," says Trevor T. Bohn, vice president at McGladrey Capital Markets LLC in Costa Mesa, Calif. Midmarket military and aerospace deals have been many and varied. Take, for example, Italian arms maker Finmeccanica SpA's $5.2 billion acquisition of Parsippany, N.J.'s DRS Technologies Inc., a surveillance and communications manufacturer, in May. "They were looking to expand their presence in the U.S. because they consider it to have the largest defense market," says Patricia Williamson, vice president of investor relations for DRS. Britain's QinetiQ Group plc bought Dominion Technology Resources Inc. in August for $105 million, and in the same month fellow English defense group Cobham plc acquired Global Microwave Systems Inc. for $26 million from Allied Defense Group Inc. in Vienna, Va. Allied Defense CEO John Marcello said in a statement that the sale of Global Microwave Systems would allow the company to reduce debt. None of the companies would say where they stand in the Cfius process.
In 2006, Dubai International Capital LLC inked a $1.2 billion deal for Doncasters Group Ltd., a British precision-engineering company with plants in Connecticut and Georgia that makes parts used in engines for military aircraft and tanks. That deal won Cfius approval. Some of the mergers involve international buyers doing deals with strategic sellers looking to streamline. For example, Cobham, on May 13, announced a deal to acquire Tyco Electronics Corp.'s M/A-COM radio equipment group for $425 million. "The sale was part of our overall corporate strategy to reshape and focus our portfolio by divesting or exiting businesses which are non-strategic," says Tyco Electronics spokeswoman Sheri Woodruff. "Cfius approval was required due to Cobham's foreign position, and it was received on a customary time frame." The tepid dollar is another factor driving foreign interest, says Robert Rubin, managing director at National Capital Cos. LLC in Bethesda, Md. "If you look at where a lot of these companies are coming from, most of them are from Europe, from markets that aren't growing as rapidly as the United States, [and] we have a weak dollar. Now's a great time to be buying," he says. Powell Goldstein's Burns agrees, predicting steady interest from companies in Western Europe. Italy, Germany, Britain and France top his list, in addition to Australia. The U.S. is proposing a defense and trade cooperation treaty with Australia, which will smooth export controls for the transfer of defense technology between the two countries. "It will be an active interest, but I don't see it increasing or decreasing. The exchange rate is still favorable on their side," Burns says. A report by PricewaterhouseCoopers LLP said the deal value of trans-Atlantic M&A in aerospace and defense was $12.6 billion in 2007, a sharp increase from $1.8 billion in 2006. Defense deals involving a European buyer and a European seller fell by 80% in 2007, according to the report, citing a weak dollar that depressed European profits and made North American targets cheaper. "European companies invested over four times more in the U.S. in 2007 than in 2006," the report says. There has also been a more relaxed posture on the part of the U.S. government toward foreign firms doing deals here. "There's generally more openness at the Pentagon to foreign acquisitions," says Philip Finnegan, director, corporate analysis at Teal Group Corp., a defense and aerospace consulting firm based in Fairfax, Va. "You also have the situation where the defense budget has been increasing, everyone's feeling pretty good about their business, so there's more willingness to see new competitors come to the market." | ||||||||||||||||||||||||||||||||||||||||||||
The U.S. defense budget is the world's largest -- more than $650 billion for 2009 alone. Such a deep pot of money has prompted foreign companies to line up to buy American military contractors. 
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