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10 Jul 02. Worldwide defense and aerospace companies either announced or completed M&A deals worth $18.8 billion in the first half of 2002, with Northrop Grumman’s agreement to acquire TRW accounting for 63% of that amount, reports Defense Mergers & Acquisitions in its just-published semi-annual review.

“The TRW deal is proof that dinosaurs still walk the Earth,” said Stuart McCutchan, editor of DM&A. “While the conventional wisdom holds otherwise, defense is not an overconsolidated industry. In the most recent government fiscal year, the top 10 contractors accounted for less than 40 percent of Pentagon spending. That puts defense well below the concentration seen in other capital intensive industries — notably automotive and aerospace.

“We expect M&A activity to continue in high gear,” said McCutchan. “A little perspective: a decade ago, steep cuts in Pentagon spending led to a remarkable consolidation of the defense industry. And today, radical change is again afoot. Donald Rumsfeld’s transformation initiative is for real. Major programs are being cut even as defense spending ramps up. The heat is again on the defense industry to restructure to meet its customer’s new priorities.”

Also increasing pressure for M&A activity is the recent onslaught of public offerings. During the past year 26 offerings have been either announced or completed, injecting $5.7 billion of public money into the defense industry. Companies are using the money to deleverage — and to bankroll new acquisitions.

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