Defense mergers and acquisitions poised to keep pace in 2019

Mergers and acquisitions in the defense contracting sector appear poised to keep pace in 2019, with two major deals announced in the past week.

A California-based defense contractor, Parsons Corporation, announced Jan. 7 it would buy Virginia-based government contractor OGSystems for an undisclosed sum. On Thursday, the hardware manufacturer Textron Systems announced its purchase of Howe and Howe Technologies, a Maine-based manufacturer of robotic military vehicles.

Both acquisitions follow two years of modest increases in U.S. defense spending under a Republican-controlled White House and Congress. The Pentagon has said in official strategy documents it would de-emphasize counterterrorism in favor of competing with China and Russia for global military dominance, standing up new weapons production efforts in areas such as artificial intelligence and hypersonic weaponry.

Defense contractors have pivoted their business accordingly. Textron Systems Senior Vice President Ryan Hazlett said the Pentagon’s shift in focus has encouraged his company to invest in the market for ground-based military robotics.

“We have seen over really the past 18-24 months a pretty significant change in the geopolitical environment in the world today, as well [within the Defense Department] a change from a counterinsurgency strategy to really more of a focus on peer-to-peer conflict,” Hazlett said. “When we looked at our business and how to position ourselves to assist our U.S. military customer, we identified a gap. … Before this we really haven’t had an opportunity to expand into the robotic ground market.”

By purchasing Howe and Howe Technologies, Textron gets access to robotic ground vehicles the Army is interested in. Howe and Howe makes a tracked robotic load-carrying vehicle called the IMET, designed to drive alongside deployed Army platoons and carry heavy materials.

The company’s robots can also be useful for more peaceful endeavors. It makes a robotic firefighting vehicle called the Thermite RS1-3 that is designed for industrial fires and those involving hazardous materials, which might be especially dangerous for human first responders.

Parsons, the California-based defense and intelligence contractor, bought OGSystems, hoping to benefit from its expertise in areas including geospatial intelligence. Both companies help U.S. defense and intelligence agencies with complex data and cybersecurity work.

The two recent mergers are the latest example of growing consolidation in the defense contracting industry, as companies jockey for position amid increased government spending on national security.

In 2017 Northrop Grumman bought Orbital ATK, a Dulles, Va.-based defense contractor focused on the defense and space industries, for $7.8 billion. United Technologies Corporation bought the aircraft parts manufacturer Rockwell Collins for $30 billion.

Last year General Dynamics bought a midsize IT contractor, CSRA, for $9.7 billion, and Reston-based Science Applications International Corporation engineered a $2.5 billion deal with the IT contractor Engility. In October, L3 Technologies and Harris Corporation unveiled plans to merge in a colossal $33.5 billion deal, thought to be among the largest for the sector.

Bob Kipps, managing director of the aerospace and defense-focused investment bank KippsDeSanto, said the he expects to see even more market activity in the next year. In a survey of business executives in the aerospace and defense sector by KippsDeSanto, more than 75 percent of respondents thought merger and acquisition activity would stay the same or increase in the next year.

“We’re extremely bullish on 2019," Kipps said. “We really think it will be a record year.”

That optimism in the defense sector comes despite a protracted government shutdown that has taken a sharp toll on civilian federal agencies including the Department of Homeland Security.

Companies that work primarily for U.S. defense and intelligence agencies have largely been unaffected by the government shutdown, though some large government contractors such as Science Applications International Corporation (SAIC) have reported that business units serving NASA have suffered.

Investment analysts say government services firms are likely to shake off the current shutdown as they have in the past.

“Seasoned investors are accustomed to that kind of craziness in the market,” Kipps said. “So far it’s not impacting any of the [merger and acquisition] appetite.”

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