Corporate dealmakers are optimistic about the economy and believe mergers and acquisitions (M&A) will pick up over the next year due to changes in tax laws and more budget certainty, according to a survey of the aerospace, defense and government services sectors by the investment banking firm KippsDeSanto & Co.
“Across all the sectors we surveyed, most respondents were optimistic that anticipated M&A activity levels would be up 5 percent or more,” Bob Kipps, managing director at KippsDeSanto, said in a statement on Tuesday. “This confidence level for the aerospace, defense and government services sectors is resulting, in part, from last year’s tax law changes, ongoing economic confidence, and an improved U.S. defense budget picture.”
President Trump last December signed a measure that lowered corporate tax rates to 21 percent and Congress this year agreed to a two-year budget agreement that allows for substantial increases in defense and federal civilian spending.
According to the survey results, 75 percent of respondents believe M&A deals in the government services sector will be up at least five percent and the remaining dealmakers polled expect deal activity to increase more than 10 percent. In 2017 there were 102 deals in this sector, up from 88 in 2016, the report says.
For the defense sector, 68 percent of respondents expect at least a 5 percent uptick in deals in 2018. M&A in this sector has been flat to down the past two years, KippsDeSanto says.
In the aerospace sector, 49 percent of respondents believe deal activity will remain level in 2018 with 2017 while 39 percent expect activity to pick up between 5 and 10 percent after three years of lower levels.
Predictions on valuations show that 49 percent of dealmakers believe that overall in 2018, values will remain about the same as in 2017, while 46 percent expect values to increase between 5 and 15 percent. The remaining respondents are split between deal values either decreasing between 5 and 15 percent or rising more than 15 percent.
The vast majority of respondents say defense spending is the primary driver behind M&A activity.
The top priority for deals is to add or gain critical mass with new offerings or technology, 48 percent, followed by adding or gaining critical mass with new customers, 35 percent, with 17 percent saying adding scale is the main rationale.
In the defense sector, C4ISR is the top focus area for deals followed closely by defense electronics, and then unmanned systems, and finally simulation and training. In the government services sector, cyber security tops the list of preferred capabilities followed by information technology modernization, which includes cloud and big data, and then systems engineering, technology platform consulting, IT support services, logistics and technology support services, and at the bottom, program and financial management.
The outlook for the economy in 2018 is robust, with 94 percent of dealmakers expecting moderate to strong growth.