The value of merger and acquisition (M&A) deals in the aerospace and defense (A&D) sector in 2015 hit a record $61.7 billion and well above the previous record of $41 billion set in 2007, the audit and consulting firm PwC says in its quarterly analysis of global M&A activity in the defense and aerospace sector.

While deal volumes declined 20 percent in 2015 to 43 deals, the average deal size more than tripled to $1.4 billion compared to 2014, Chuck Marx, US Aerospace and Defense Leader for PwC, says in his summary of the latest issue of Mission Control. The deal activity refers to acquisitions greater than $50 million.

PwC US Aerospace and Defense Leader Chuck Marx. Photo: PwC
PwC US Aerospace and Defense Leader Chuck Marx. Photo: PwC

The largest deal in the sector was Berkshire Hathaway’s $31.6 billion acquisition of Precision Castparts, accounting for nearly half of the overall deal value for the year.

“This deal speaks to the positive outlook of the commercial aerospace market and PCP’s current position on key commercial growth platforms, high margins, and stable free cash flows,” Marx says. Aerospace and maintenance repair and overhaul business accounted for 69 percent of total deal value last year.

Another megadeal, the largest in the defense industry, was Lockheed Martin’s [LMT] $9 billion acquisition of Sikorsky Aircraft from United Technologies Corp. [UTX]. Marx says Berkshire’s acquisition of PCP was the largest ever in the A&D sector with Lockheed Martin’s purchase of Sikorsky ranked ninth.

For 2016, expect commercial companies reducing defense exposure and large and mid-size defense suppliers to merge with each other to seek “cost efficiencies,” Marx says. In the defense area “Increased cyber attacks, threats of terrorism, and greater geopolitical instability continue to drive activity toward targets with capabilities in electronic warfare, C4ISR, and cybersecurity,” he adds. Remotely piloted aircraft are also of interest to buyers, he says.

Deals for government services businesses are also expected to continue with the business are expected to consolidate by 25 to 50 percent in the next three to five years driven by the desire to “increase scale to improve affordability and effectiveness,” Marx says. He expects there to be about six government services firms with between $5 billion and $10 billion in annual sales.

Deal activity in the A&D sector is expected to remain healthy this year, Marx says.

The report also says that private equity firms and financial buyers are expected to continue to have interest in commercial aircraft companies and that the commercial aerospace sector’s supply base will consolidate in the face of demand for more integrated systems and complete subsystems.

PwC says that North America accounted for the vast majority of deals in 2015, 91 percent of all deal value and 63 percent of all activity. It also says that deal activity involving China, to include undisclosed deals and those valued at less than $50 million, increased 64 percent in 2015 to 46 deals.