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Global unrest, strategic supply chains and a war for talent shape the A&D landscape
Global unrest and an acceleration of political and economic rivalries are fueling defense spending. A reshaping of supply and value chains continues as countries look to secure strategic capabilities through onshoring and friendshoring. The commercial aerospace recovery after the COVID-19 pandemic continues as global air travel is forecast to exceed 2019 levels in 2024 into 2025. Major recent developments include the following:
- In the defense sector, significant focus remains on innovation and a transition to agile technology platforms. The conflicts in Ukraine and the Middle East further underscored the need for legacy platforms, replenishing dwindling stockpiles and investing in critical defense industrial base. These influences together are driving deal activity.
- Airlines are choosing to keep their aging fleets for several reasons, including ongoing supply chain challenges, inflation and labor difficulties. All these factors are fueling the demand for maintenance, repair, overhaul (MRO) and aftermarket services.
- The global space economy continues to grow with space systems becoming a larger share of revenues generated globally. We expect this upward trend to continue to be driven by vital segments such as communications, logistics and transport.
- Based on a joint survey by PwC and the AIA, attraction and retention of talent in engineering, automation and cybersecurity is a key priority of the sector. The industry continues to face challenges from big tech and the broader tech sector for labor resources, especially engineers, as it faces a demographic shift in its workforce. Roughly 30 percent of the industry’s workforce is over 55, raising concerns about the potential loss of knowledge and specialized skills in the coming decade.
Note: The primary M&A data source used in the midyear outlook is S&P Capital IQ.
How market conditions are impacting M&A strategy
As regulatory pressures persist in the current landscape, M&A activity is anticipated to concentrate on small to midsize transactions. Companies are specifically targeting transactions that can address strategic gaps or initiatives, including internal technology and labor talent gaps. Long-term budget planning and portfolio reviews are underway to prepare non-core assets for carve-out divestitures. These assets are being readied for market in the next six to 18 months. Ongoing emphasis on joint ventures (JVs) and minority investments aims to enhance capabilities in emerging technologies, while minimizing the risks.
Cross-border activity is expected to remain muted due to geopolitical factors and countries prioritizing the establishment of secure strategic supply chains. However, private equity (PE) sponsors, who are experiencing pressure to realize their investments, may provide a tailwind. With debt markets opening up and interest rates stabilizing, the stage is set for a boost in M&A activity in the second half of 2024 and into 2025.
“We expect a continued increase in deal activity as corporates rationalize their portfolios and PE is helped by an improved financing environment. M&A activity is anticipated to concentrate on securing supply chains, acquiring scarce STEM (science, technology, engineering, mathematics) talent and investing in emerging technologies.”
The bottom line
The A&D sector is currently operating in a dynamic landscape. Companies within the sector are focused on long-term innovation and emerging technologies and are funding these priorities through divesting non-core assets.
Both the aerospace and defense segments should benefit from increased government and commercial spending stemming from increased post-pandemic travel and heightened geopolitical tensions. US elections and global conflicts will play a pivotal role in shaping the near-term outlook.
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