U.S. Aerospace & Defense Execs Expect Significant M&A, Industry Consolidation Amid Sequestration Budget Cuts: KPMG …

NEW YORK, June 28, 2012 /PRNewswire/ --Armed with significant cash on their balance sheets, and faced with hundreds of billions of dollars in federal defense budgets, U.S. aerospace and defense (A&D) executives cite strategic acquisitions as the highest-priority investment area to spur company growth, according to a recent survey by KPMG LLP, the audit, tax, and advisory firm.

In the 2012 KPMG A&D Industry Outlook survey, nearly three-quarters (71 percent) of A&D executives say their companies will be involved in a merger or acquisition in the next two years. In addition, 64 percent of A&D executives indicate that their companies have significant cash on their balance sheets, and more than half (53 percent) say they will increase capital spending this year.

Many executives say the highest-priority use for that capital will be strategic acquisitions for their companies (49 percent) up significantly from 41 percent in KPMG's 2011 survey. Forty-two percent say they will also aggressively invest in new products and services.

"The way we see it, there's a day of reckoning coming, and many A&D executives are telling us that this may spur an industry response similar to what drove major industry consolidation in the 1980s and 1990s, or perhaps an even more dramatic response," said Martin Phillips, U.S. and global leader of KPMG's aerospace and defense practice. "They are rethinking their strategies and becoming much more aggressive to drive growth and compete."

Phillips adds that U.S. government contracts are dwindling, companies are becoming more global, and foreign investors are looking to move into the "non-government" A&D sector as well. "All of these factors set the stage for much more aggressive M&A, product strategies and international growth initiatives."

In fact, when asked about the biggest drivers of revenue growth over the next three years, A&D executives most frequently cited acquisitions and joint ventures (50 percent) and new product development (50 percent). In addition to continued focus on cost reduction and operational improvement, executives say that the top management initiative for their companies in terms of energy, time and resources will be investigating opportunities for mergers and acquisitions.

"Companies must find a way to break through to new customers and markets, which in many cases will only be possible through partnerships, joint ventures or pure acquisitions," said Doug Gates, partner in KPMG's aerospace and defense practice. "In this era of continued belt tightening, we also must not ignore just how attractive some of our domestic assets look to foreign investors, especially as A&D companies look to divest from underperforming assets."

International Expansion Remains a FocusWith a continually challenged domestic defense sector, A&D executives remain focused on international growth. In fact, the four main strategies to fuel that growth are partnerships/joint ventures (41 percent), foreign military sales (38 percent), international expansion (36 percent) and acquisitions (24 percent). According to the A&D executives surveyed by KPMG, the highest priority foreign markets are Asia (other than China), Europe and the Middle East.

Phillips notes "last year 54 percent of executives identified foreign military sales as the key strategy, but the drop in the results this year appears to indicate a realization that the foreign opportunities these companies are pursuing take several years to materialize. We continue hear about India and Brazil, but look at it realistically and you see that foreign military orders have been minimal to date."

Despite foreign sales challenges, looking ahead three years, nearly half (43 percent) of executives surveyed by KPMG say that non-U.S. operations or customers will account for more than a quarter of their companies' revenues, compared with just 35 percent who currently derive more than a quarter of their revenue from foreign operations.