JUST IN: Boeing to buy drone-maker Aurora Flight Sciences; Some clues about the 2019 budget; Contracts, exports, and more...

There’s a wave a of mergers and acquisitions under way right now. Some are mega deals — like United Technologies’ plan to buy Rockwell Collins and Northrop Grumman’s plan to buy Orbital ATK. Others are smaller, the big guys snapping up startups.

Boeing had made no secret that it was shopping; there were a whole bunch of whispers at the Air Force Association annual trade show just two weeks ago. We now have our answer: The Chicago-based giant plans to buy Aurora Flight Sciences, a leader in drone technology. Boeing executives say Aurora would bring it a cutting-edge research-and-development shop that it could apply to to both defense and commercial projects. The companies already work together on a hydrogen-powered drone called Phantom Eye (Aurora builds the wing and did engine development). Aurora also helped develop Boeing’s new 777X jetliner.

Greg Hyslop, Boeing’s chief technology officer and senior vice president of Boeing Engineering, Test & Technology, and John Langford, Aurora founder and chief executive office, just held a Thursday morning conference call to discuss the pending sale. The highlights:

• Boeing approached Aurora a “few months ago,” Langford said, noting his firm had not been shopping itself around. “The more we thought about it, the more we realized that this could be a really powerhouse of a combination and it would allow us to move to the next level in getting our innovations out onto the world market,” he said.

• “We both have projects that I’m sure we wish we could tell people more about that we can’t right now,” Hyslop said. “We’re both pursuing a number of projects in a number of areas that I think are … very exciting and I think we’ll be able to mutually benefit each other in terms of those programs.”

• “We want Aurora to stay Aurora, but be part of Boeing,” Hyslop said. Langford “and his team” will report to Hyslop. “That’s a little different model than we’ve done in prior acquisitions, but the reason is because we see them as an asset that will … be able to help the whole broad enterprise of Boeing both commercial and defense.”

• Executives hope the deal will close “very quickly,” as Hyslop put it.

I asked Hyslop what the deal to buy Aurora might say about other types of technology might be looking to acquire? His response: “We’re always looking at a lot of different things to acquire. He mentioned investment by the firm’s VC arm HorizonX in Zunum Aero (hybrid electric aircraft), SparkCognition (artificial intelligence), Upskill (augmented reality for manufacturing), and C360 (360° video and augmented/virtual reality). “We’re continuing to look for those kinds of investment opportunities,” Hyslop said. “Bringing Aurora into this through an acquisition, you can kind of see that the world is going to be about hybrid electric airplanes, or all electric airplanes. The world is going to be about more autonomy and how artificial intelligence enables that. They’re all part of that picture. We don’t know what that market’s going to look like in the future, but as it forms. We want to be there and we want to lead.”

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More air support for Afghan forces will help drive the Taliban to the negotiating table, Mattis and Dunford tell Congress.

Hints about Pentagon’s Future Budgets

Because the Trump administration’s 2018 budget proposal did not include five-year spending projections, we’ve largely been left to guess what might appear in 2019 (the year defense officials have said they plan to start growing the military) and beyond. Right now, the military services are building their 2019 spending plans, as they wait to see if Congress raises the spending caps limit Pentagon spending through fiscal 2021.

We now have another clue about where things might be heading. During his confirmation hearing for a second two-year term as Joint Chiefs chairman, Gen. Joseph Dunford said the Pentagon needs between 3 percent and 7 percent annual growth “for us to build the capabilities we need” to outpace China and Russia’s militaries.

Since the Pentagon has requested a base budget of $574 billion for fiscal 2018 — which began on Sunday — Dunford’s figures would mean a bump of $17 billion to $40 billion for next year. But remember: even this year’s request exceeds its spending cap. Absent a deal, the Pentagon’s 2019 limit is just $562 billion.

Still, Dunford’s comments drew attention from investment analysts, particularly because just a few months ago, he and Defense Secretary Jim Mattis were talking about annual growth of 3 to 5 percent.

Which begs the question: would that extra 2 percent allow President Trump to grow the military to the levels he talked about during his campaign? No, said Roman Schweizer, an analyst with Cowen & Company, in an Oct. 2 note to investors.

Heritage’s Latest Take on the State of the U.S. Military

The more than 400-page 2018 Index of U.S. Military Strength is “the biggest, most extensively footnoted and researched” edition ever done by the think tank, according to Thomas Spoehr, a retired Army lieutenant general who runs the Heritage Foundation’s Center for National Defense. It characterizes the Army and Marine Corps as weak “compared to what is expected” of the them, he said. It ranks the Navy, Air Force and nuclear forces as marginal. Read the whole report here.

SecNav Checks Out Helo Mod Shop

Richard Spencer visited Lockheed’s Owego, N.Y., helicopter modification shop last week, the company announced. The plant is where Sikorsky helicopters — like the Navy’s MH-60R Seahawk, touted as “the world’s most advanced maritime helicopter” — go to get unique equipment installed. New Marine One helicopters and the Air Force’s Combat Rescue Helicopter also go through this site.

UK Weighs in on Boeing-Bombardier Fight

Mixed signals are coming from U.K. politicians about the trade dispute between Boeing and Bombardier. (Remember: the U.S. has imposed a 220-percent tariff on Bombardier’s CSeries jetliner.) More than 4,000 workers in Belfast build the wings for the aircraft. While U.K. government officials have criticized Boeing publicly, Bloomberg reports that they privately blame Canada for aiding Bombardier.

Canada has plans to buy new F-18 Super Hornets from Boeing to fill out combat squadrons while while it decides whether it will replace its older F-18s with F-35 Joint Strike Fighters or another aircraft. Now Canadian officials are sending their own mixed signals about whether they will proceed with or cancel the F-18 purchase.

Flashback to June: Before the U.S. Commerce Department decided to impose the CSeries tariff, I asked Boeing Defense CEO Leanne Caret (at the inaugural Global Business Briefing) about how the firm balances its defense and commercial relationships. She said, “Our message has continued to be this was a Boeing Company decision and it was important to us. As we were working through the process we have been very thoughtful and pragmatic as we approached this situation. As it relates to the defense side, we have been a partner with the Canadian government since 1919. They fly our Chinooks. We have done a lot of business with them. We view them as a key partner for us. We look forward to continuing the dialog and continuing to demonstrate the capability that the Super [Hornets] provide and why that is the right choice for them for their interim solution.” Video is here, at the 15:00 mark.

State OKs $0.9 Billion in Raytheon Exports

Sale No. 1: 3,900 Small Diameter Bomb IIs for up to $815 million, to Australia, which plans to use them on its F-35 Joint Strike Fighters.

Sale No. 2: 57 AMRAAM air-to-air missiles, a sale worth up to $133 million, to Japan.

Bonus: Speaking of Raytheon, Deutsche Bank upgraded the firm from hold to buy, and bumped its price target from $180 to $210 per share, reflecting an anticipated uptick in spending on missile defense. Deutsche Bank also upped stock price targets for Northrop Grumman and Lockheed Martin.

Two Big Contracts

• The Navy awarded Harris a $765 million deal for radios.
• The Air Force awarded Pratt & Whitney a $2.7 billion deal to support the F117 engines on its C-17 cargo planes and aircraft owned by U.K., Canada, United Arab Emirates, Kuwait, Qatar, India, Australia and Strategic Airlift Capability, a consortium of U.S. partners.

Manufacturing Report for Manufacturing Day

Friday is Manufacturing Day, so here’s a report from Deloitte on the public’s perception of the sector. BLUF: “US public overwhelmingly believes manufacturing is vital with more than eight in 10 Americans indicating the importance of the US manufacturing industry in maintaining the ‘American Way of Life.’”

Next Week: Global Business Briefing with L3 CEO

Come on out to The Watergate at 9 a.m. on Wed., Oct. 11, where I will be interviewing L3 Chairman and CEO Mike Strianese at our second Global Business Briefing. We’ll be talking about the firm’s current projects, how it is positioning itself for the future, the health of the defense industrial base, and more. Register to attend, here.

Also Next Week: The annual association of the U.S. Army mega trade show at the Washington Convention Center. And the Week After That: Vice Adm. Robert Burke, the chief of Navy personnel, speaks at an NDIA event at the Army Navy Country Club.

Making Moves

• The White House intends to nominate Shon Manasco to be assistant Air Force secretary for manpower and reserve affairs.  He most recently was executive vice president and chief administrative officer for USAA.
• Cubic Global Defense named James Craig vice president and general manager of ground training systems.
• Alphonse “Al” Whitmore has been appointed president of BAE Systems’ Intelligence & Security sector.
• Retired Gen. John Allen has been named the next president of the Brookings Institution.