AIRSHOW-Defence groups eye niche buys in quest for growth

* Defence firms eye deals for cyber, niche technology groups

* Communications and fraud protection on MA radar

* Industry banker says deals up to $2 bln possible

* Big deals unlikely for now amid uncertainty on govt spend

FARNBOROUGH, England, July 11 (Reuters) – Arms makers are
sizing up niche acquisitions in cyber security and commercial
aerospace in the hunt for growth as uncertainty over military
spending in the West has put larger-scale defence sector deals
on hold – at least for now.

Feeling (Taiwan OTC: 3291.TWOnews) the strain from shrinking defence budgets in the
United States and Europe (Chicago Options: ^REURUSDnews) , weapons makers from Britain’s BAE
Systems to U.S. group Raytheon (NYSE: RTNnews) are eyeing
companies with innovative technology or a strong position in a
specialist market, ex ec utives at the Farnborough Airshow said.

“Cyber and IRS (intelligence, surveillance and
reconnaissance) are the only real growth areas in the defence
sector at the moment and the big players are looking to move
into those spaces more and more,” said David Baxt, the global
head of aerospace and defence investment banking at Jefferies.

Companies with a large exposure to defence markets have
already started acquiring smaller groups that can take them into
a more commercial space.

British aero and defence group Cobham (LSE: COB.Lnews) ‘s recent
275-million-pound ($426 million) acquisition of Danish satellite
and radio equipment maker Thrane Thrane (Copenhagen: THRAN.COnews) took it into the
communications market, while BAE’s acquisition of Norkom earlier
this year moved it into financial services and fraud protection.

William Swanson, chief executive of U.S. arms maker
Raytheon, said his company had not slowed its acquisition plans
due to the uncertainty surrounding the U.S. defence budget, but
that it was focusing on buying up smaller specialist firms.

“We’re buying four or five companies a year. They’re small,
but they’re niche for us and it hasn’t slowed our activity,”
Swanson told Reuters at the air show.

“Cyber has been a good one for us and our business has been
growing, and it’s really growing because of cyber.”

Raytheon acquired three cyber companies in 2011.

SMALL DEALS FOR NOW

One problem holding deals back, however, is the unrealistic
expectations many companies have about their valuations.

“People still have beachfront property prices, mentally, and
eventually prices will have to somewhat stabilize. Not every
property is worth what people think it’s worth,” said Swanson.

Industry experts do not see a wave of huge deals happening,
as seen in the 1990s, because the defence sector has already
shrunk to be dominated by a handful of groups.

That calculus could change, they say, if the U.S. Congress
does not avert an additional $500 billion in military spending
cuts due to take effect in January under a process known as
“sequestration.”

Those cuts would be in addition to $487 billion in
reductions already planned in the United States, which remains
the world’s largest market for weapons.

One London-based defence sector fund manager said mid-market
deals worth up to the $2 billion mark were possible, with
companies such as UK aero electrics specialist Ultra Electronics
having “attracted admiring glances from some of the
bigger players” in recent months.

Britain is cutting 8 percent in real terms over four years
from its 34 billion pound defence budget.

Marwan Lahoud, chief strategy officer of Europe’s biggest
aerospace company EADS (Other OTC: EADSF.PKnews) , said acquisitions were
necessary as it would be impossible to offset the downturn in
government defence spending through new export markets alone.

“You need to change the perimeter, you can always grow
through acquisitions. If we look at anything it would be
spin-offs or niche. It would not be anything substantial,” he
said.

($1 = 0.6454 British pounds)

(Editing by Mark Potter)

Leave a Reply