Aerospace & Defense (A&D)

The outlook for the Aerospace & Defense industry is neutral. It is a cyclical industry and highly dependent on conflict. During times of war, defense spending rises swiftly followed by capital expenditures into mass research & development. U.S. defense spending outpaces every other nation in the world, with the Department of Defense allocating $622.6 billion for defense funding in the 2020 fiscal year alone. The U.S. continues its policy of providing the best weaponry to protect its many national interests around the globe.

Contemporary Mergers and Acquisitions (M&A) activity in the industry has undergone a paradigm shift as it strays away from megamergers and approaches acquisitions, providing new products, and global market diversification. Acquisition strategies reflect a robust emphasis on short financial records, few competitors, or emerging countries. Integrating overseas operations into domestic business models has proven to be a challenge for companies seeking acquisition benefits. Despite an evolving M&A landscape, activities remain high.

Aerospace & Defense industry revenue totaled $686 billion in 2018. While the Aerospace & Defense industry revenue increased 1.8% from 2013-2018, the industry is expected to grow at an annualized rate of 2.3%-3.1% from 2019-2024. Industry growth is expected to be driven by Aerospace & Defense companies’ desire to restructure and position themselves for profitable long-term growth. Amid COVID-19, it is likely the industry will take advantage of the drop in demand to alter supply chains. M&A deal activity surpassed $109 billion in 2019, while the uncertainty around the pandemic in 2020 resulted in a total year-to-date deals value of $20 billion. Experts note that the Aerospace & Defense industry will be driven by improved liquidity, including financially stable companies that may prioritize M&A to drive long-term growth. Due to these catalysts and an increase in the overall efficiency of aerospace and defense, M&A and general investing alike are also expected to rise through2024. Exhibit 2 shows the trends in investing activity from 2016-2020.

For the most part, current trends are generally expected to be maintained in the sector for the foreseeable future. One new concern, however, is that the commercial space may have saturated the international market to a point that aircraft prices and profitability will begin to decrease. Also, oil prices being so low may temper demand for investing in new fuel-efficient planes, despite lower expenses making such an investment easier to commit to. The defense segment will likely benefit from sustained international demand for missiles and other new technologies, driving much of the sector’s increase in revenues in the near future. This demand might not be as strong from oil-based economies, such as Saudi Arabia. Space exploration is moving forward steadily, but not at a volume that will significantly impact the sector’s overall growth.

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