Will the Raytheon-United Technologies merger win approval? And who’s next? While we wait to find out, let’s see how merger-and-acquisition activity in recent months compares to historic levels.
A new PricewaterhouseCoopers analysis of the M&A market has useful data. So far, 2019 has seen 220 deals, one more than the total announced last year at this point, and about 5 percent higher than the 10-year average. But the total value of this year’s deals — $64.4 billion — is a whopping 2.7 times that of last year’s to this point, the report says.
Yet that topline growth is mostly due to the $53 billion Raytheon-UTC mega-deal, which accounts for all but $5.3 billion of the value of the 110 deals announced in second-quarter 2019.
“Given the long-term nature of the industry, it is difficult to ascribe great meaning to quarterly fluctuations in activity and value,” the report said. “However, absent the UTC/Raytheon transaction, the second quarter of 2019 was relatively lackluster. Indeed, we did not witness the recovery typically seen from a seasonally slow first quarter.”
So what might the future hold?
“The fundamentals certainly appear to support small to mid-sized transactions, which we believe will continue to drive the trends,” the report said. “However, the creation of a major player in the second quarter may indeed generate urgency for scale deals, some of which could be significant.”
PwC believes that 2019 “will be a solid year for deal making.”
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One-on-One with SAIC’s New CEO
Nazzic Keene today became CEO of SAIC, replacing the retiring Tony Moraco. It’s been a busy year at the company, which saw contracts disrupted by a partial government shutdown in December and January and closed its acquisition of Engility. Keene chatted with Defense One on Tuesday about her priorities for the firm and the state of the defense industry. Here are some excerpts:
Q. What changes are you planning initially and in the months and years ahead?
A: As I think about my priorities as we go into this next chapter here, it's a little to do with the CEO change, but more so with just where we are as a company. Having done the Engility acquisition now,…we've been able to fully integrate the organization. So, continued focus on integration [and] continued focus on ensuring that we drive the value of that integration is priority one.
We also have the opportunity to leverage the new position that we sit in today as a bigger company, a more diversified company and a stronger company to really look for the opportunity to drive growth. That's really a priority — has been for the last few years...but I think we're better positioned today than we've ever been to be able to realize and capitalize on what's happening in our industry and the priorities of the national stage and drive growth based on the position of our company.
The third is really a refreshed and renewed focus on talent — whether it's talent acquisition, talent retention, talent development. At the core of SAIC, we are a people-centric business. We solve our customer's mission challenges leveraging great solutions and fabulous people. Ensuring that we remain a leader in the people side, the talent side of the equation in our industry, is paramount for us.
A lot of the work that we're doing and a strategy refresh and looking at what's going to drive growth at looking at where we're going to make our investments and place our bets is to support those priorities.
Q. Let’s talk about competing for talent. The defense sector is growing in general; here in the D.C. region, Amazon and others are coming in.
A. On the competitive market side, we share the enthusiasm that you referenced as it relates to growth. On the talent side, in many cases we all compete for the same great talent that's in the industry — especially in areas in which there's sometimes more demand than supply. If you think about those individuals or talent pools with specialized clearances. We'll continue to compete and win our fair share of those competitions on talent acquisition and talent retention.
But there are opportunities as we look at some of the initiatives that the government is focused on. I'll use an example of IT modernization is certainly one area where many times the work needs to be done in conjunction with the customer and you need to be sitting alongside the customer and supporting it. In many cases the work can be done from someplace else. We do look for other creative ways to bring great talent to support our customers that allow us a little more geographical flexibility and also allow us to tap in some other regions in the country with great universities or great skills that we can bring to bear.
The other thing, in conjunction with our strategy refresh, we're also looking at how we as a company might want to tweak some things or change some things to ensure that we are a career destination, we’re a choice that people make each and every day and that individuals can build their career at SAIC for the for the duration of their career. We we continue to look at opportunities to ensure that we are very competitive when it comes to attracting and retaining talent.
Q. SAIC recently closed its Engility merger, and the proposed Raytheon-United Technologies merger is getting a lot of interest. How are you viewing M&A, in the sector and for SAIC?
A: Obviously there continues to be a good stream of activity in the industry. I think the optimism, at least for the foreseeable future as it relates to budget clarity and budget priorities, is probably driving some of that. I think that's a positive thing.
As I look to SAIC, we just did a big one. One of our key priorities, and my key priorities, is to continue to ensure that that goes as well as it has to date. That's getting a lot of focus. But with that being said, we continue to look at what's in the market. We continue to look at our strategic imperatives and where an acquisition might accelerate our time to market or give us some market access and and we'll continue to do that. So my sense is that M&A will likely continue as each company looks at their strategy and determines where they want to either double down or make some investments through M&A versus organic. And certainly we're going to look at that as well. But with that being said, [we] probably aren't driven to do a significant one anytime in the immediate future — would look more to smaller to midsize ones to complement and support our strategy.
Q. SAIC executives were pretty outspoken about the government shutdown. Have you guys recovered fully from that? Are you still making still outstanding payments?
A. On the payment side, I believe we're all caught up. I think that the good news is that happens very quickly. So we haven't seen any you know any lagging there. There are a couple awards — and I'm not going to talk specifically to what they are — where the customer has told us that they had to delay due to the shutdown.... But we have heard anecdotally that that's put a couple things on a slower path, but nothing substantial. For all intents and purposes. we're reasonably caught up and and that's behind us and hopefully not something we have to go again.
Air Force Silent About Boeing No-Bid for New ICBMs
One week after Boeing said it would not bid enter a bid on an expected $85 billion program to build new nuclear-tipped intercontinental ballistic missiles, Air Force officials have said almost nothing about it — except that they’re not going to say anything. “On July 16, 2019, the Air Force released a request for proposal for its Ground Based Strategic Deterrent intercontinental ballistic missile weapon system. While the Air Force remains in source selection, we will not provide any comments to preserve the integrity of the competitive process,” Capt. Cara Bousie, an Air Force spokeswoman, said in July 30 email.
But Air Force Gen. John Hyten, the commander of U.S. Strategic Command, responded to a question about it on Tuesday.
“I always get concerned when competition disappears from America,” Hyten said at his confirmation hearing to be Joint Chiefs vice chairman. “Anytime we’re in a competitive environment that puts pressure on schedule, pressure on cost, then we have a higher likelihood of getting delivery of the capability. That’s why I was so disappointed when Boeing decided not to compete for GDSB. I’m not in the acquisition world though, and I haven’t talked to the Air Force acquisition or the DoD acquisition leadership about the impacts of that. I know that we have many programs that are well-run with a single contractor at this point in the competition. I think that the remaining competitor could be that person, but I have not looked at it in detail.”
New Report Saudi Arms Suppliers
Some 90 percent of U.S. arms deals with Saudi Arabia, measured by the value of those deals, have involved Raytheon, Boeing, Lockheed Martin or General Dynamics, according to a new report from Bill Hartung at the Center for International Policy. “Many of these sales involve bombs, missiles, and aircraft that have been used in Saudi Arabia’s brutal war in Yemen, killing thousands of civilians,” he writes.
Last week, President Trump vetoed three Senate resolutions (here, here and here) that would have blocked weapon sales to Saudi Arabia and the United Arab Emirates. A Senate attempt to override the veto failed. Soon after, Sen. Chris Murphy, D-Conn., a lawmaker who has been working to block arms sales to Saudi, said: “I’ll be pursuing legislation in September that holds the Saudis accountable and allows Congress to vote on the totality of our security assistance to Saudi Arabia.”
State clears $2.5B in arms deals: Over the past week, the State Department has approved exports of more than $2.5 billion in arms and defense gear to six countries. The deals and their values:
- Canada: 152 MIDS-JTRS radio terminals and support, $44 million.
- Egypt: Support for various ships, $554 million.
- South Korea: Logistics support for Global Hawk intelligence drones, $950 million.
- Thailand: 60 Stryker infantry carrier vehicles, $175 million.
- India: C-17 sustainment, $670 million.
- Pakistan: F-16 technical support, $125 million.
But here’s one deal that hasn’t been approved: An $8 billion F-16 sale with Taiwan. The New York Times reports that the Trump administration could be slow-rolling the 66-aircraft deal. “Lawmakers are now questioning whether the Trump administration is delaying approval of the sale, either to avoid upsetting Beijing while delicate trade negotiations are underway or to use it as a bargaining chip,” the Times reports.
Raytheon to upgrade Germany Patriot’s interceptors: It’s part of a $105.5 million deal to keep the air and missile interceptors working through 2035, the company said in a June 29 statement.
Dynetics Buys Electron Beam Welding System
The 22-foot long, 22-foot wide, 22-foot high welding machine will be used for classified and unclassified projects, the company said in a July 25 statement. “The system will be an essential addition to our precision machining and fabrication center,” the company said. Dynetics also purchased a smaller welding system. They’ll both be installed at the company’s Huntsville, Alabama, headquarters.
The Senate on Wednesday confirmed David Norquist as deputy defense secretary. Richard V. Spencer, who was performing the duties of the deputy secretary for the past week, has gone back to solely being Navy secretary.
Gary Roughead, the retired admiral who last served as chief of naval operations, has been elected board chairman of Fincantieri Marinette Marine. Also, Kevin Sweeny, a retired Navy rear admiral who most recently was former Defense Secretary Jim Mattis’ chief of staff, has been elected to the firm’s board.