European Defense Firms Buy Into U.S.
Operating below Wall Street’s radar, Europe’s biggest defense contractors have been buying up small U.S. aerospace companies in hopes of grabbing a piece of the Pentagon’s record defense budget.
The deals have gained little attention because they’ve been relatively modest, typically valued at about $100 million apiece. But the European buying spree has netted 20 U.S. companies this year, many in Southern California, at a total transaction cost of nearly $2 billion, according to investment bank Houlihan Lokey Howard & Zukin. That’s up from nine acquisitions last year and five in 2002.
“The U.S. defense market is the largest in the world,” said Jon B. Kutler, chief executive of aerospace investment bank Jefferies Quarterdeck in Los Angeles. “Everybody is positioning themselves to get a bigger bite of that.”
The draw is the Pentagon’s $140-billion procurement and research budget. It accounts for more than half of worldwide spending on weapons, but most contracts are awarded to defense companies based in the U.S.
That has brought the Europeans to this side of the pond. So far, they’ve acquired mostly smallish companies because, analysts said, those are less likely to trigger a political backlash; a takeover of a large contractor that does major work for the Pentagon could alarm Congress, which is considering a bill that would restrict awarding military contracts to foreign firms.
Although the modest-sized aerospace firms may not generate significant income for their new European owners, they “are important because they allow the European companies to have a U.S. base to bid” for lucrative Pentagon contracts, Kutler said.
One recent deal that raised some eyebrows came when Europe’s largest defense contractor, European Aeronautic Defense & Space Co. made its first U.S. acquisition, gaining Irvine-based Racal Instruments Inc. for $105 million in October.
Racal, a 40-year-old company, designs and makes devices to test a variety of electronic equipment, including cellular phones, jet engine components and radar gear used in military planes, helicopters, missiles and other weapons systems. The company employs about 320 workers at facilities in Irvine and San Antonio and is expected to generate about $84 million in sales this year.
The Racal deal was notable because EADS, a Dutch-based consortium, also owns 80% of Airbus, which in 2003 surpassed Chicago-based Boeing Co. as the world’s largest commercial aircraft maker.
Ralph Crosby, head of EADS’ North American operations, said the Racal acquisition was part of a move to gain more business in the U.S.
“It’s not crawl, walk and run, but a deliberate strategy,” Crosby said, “to do more and more defense work.”
Indeed, the first step in EADS’ U.S. expansion plan came two years ago when it hired Crosby, a former top executive at the third-largest U.S. defense contractor, Northrop Grumman Corp., to head its American operations. Last summer, Crosby created EADS North America Defense Co., a subsidiary of EADS North America Inc. with its own board of directors, and negotiated a special security agreement with the Pentagon so it could work on certain classified U.S. military programs.
The European companies seem to be following the lead of Britain’s largest defense contractor, BAE Systems. In the last five years, BAE has amassed 13 U.S. companies and has become the fifth-largest defense contractor with the U.S. government.
BAE has focused its purchases on firms that develop electronic and avionic components. One recent BAE acquisition was Herndon, Va.-based DigitalNet Holdings Inc., a developer of computer networking systems for the Pentagon that has annual revenue of nearly $300 million and 2,200 workers.
Another active buyer has been Britain’s Smiths Group, which has snapped up six U.S. firms this year.
“In aerospace, whether it’s civil or military, the U.S. is the largest single market place in the world,” said John Ferrie, managing director for the company’s aerospace unit. “If you want to be a player, the U.S. is the place to be.”
Smiths’ acquisitions include tiny Pasadena-based Cyrano Sciences, with 25 engineers. Cyrano, founded by Caltech professors, develops miniature sensors for detecting and identifying chemical vapors. Smiths paid about $15 million for Cyrano.
And in October, Smiths bought Santa Ana-based Integrated Aerospace for $110 million.
Integrated Aerospace has 200 employees working out of two manufacturing plants in Santa Ana and Signal Hill. It makes landing gear components for small aircraft such as the Black Hawk helicopter and the F/A-18 Hornet fighter jet as well as for business jets and unmanned aerial vehicles. The company also makes external fuel tanks for military planes and has generated about $50 million in sales this year.
In all, Smiths has spent about half a billion dollars to acquire American companies. It now employs more than 5,000 people in the U.S., a market that is expected to soon account for more than half of the company’s aerospace sales.
The acquisitions reflect the increasingly global nature of aerospace business, Ferrie said. To gain a bigger foothold in the U.S. market, the strategy is to supply complete systems rather than piecemeal components.
Smiths’ purchase of Integrated Aerospace, for instance, will complement its landing gear business in Europe and allow it to sell a complete landing gear system to customers in the U.S. or overseas. To compete as a supplier of complete systems, Ferrie said, “you have to be a global player.”
Not to be outdone, Italy’s largest aerospace firm, Finmeccanica, wants to expand in the U.S. and is ready to spend at least $1.2 billion buying small to medium-sized companies, said Pier Francesco Guarguaglini, the company’s chief executive.
Finmeccanica is already active in the U.S.; it partnered with Bethesda, Md.-based Lockheed Martin Corp. in a bid to replace the Marine One presidential helicopter. As part of that effort, Finmeccanica recently built a plant for its AgustaWestland helicopter subsidiary in Philadelphia.
The $2-billion Navy contract up for grabs is for as many as 23 customized presidential helicopters. The competition is down to two: Sikorsky Aircraft, owned by Hartford, Conn.-based United Technologies Corp., and Lockheed-AgustaWestland.
As is always the case with defense contracts, politics play a role. In this case, though, it’s with an international accent: Although Italian-owned, AgustaWestland is best known for making a fleet of British military helicopters that transport politicians and royalty from that country. And last year, British Prime Minister Tony Blair lobbied the White House on behalf of the AgustaWestland’s bid.
