The outlook for the economy and mergers and acquisitions (M&A) in the aerospace, defense and government services industries remains solid for 2019, according to the results of a survey of dealmakers by the investment banking firm KippsDeSanto released on Tuesday.

Around 50 percent of responders expect M&A activity in 2019 to remain the same as in 2018 in all three sectors while 28 percent expect it to increase by at least 5 percent, the survey, Aerospace/Defense & Government Services 2019 M&A Survey, shows.

Robert Kipps, managing director of KippsDeSanto. Photo: KippsDeSanto

“While slightly less optimistic than dealmakers’ predictions for 2018, it shows continued, if more tempered, optimism about activity levels in each sectors,” KippsDeSanto says.

The top M&A priority for most respondents, 44 percent, is to gain critical mass with new offerings and technologies while 43 percent say their top priority is to gain critical mass with new customers. Only 16 percent say their top priority is to add scale.

For the Aerospace sector, the top four priority investment areas are proprietary engineered components and subsystems, supply chain management, machining and forming, and additive manufacturing. The top four defense priority investment areas are electronics, C4ISR, unmanned systems, and software.

In the government services sector, the top investment priority is cyber security followed by information technology modernization such as cloud and big data. A distant third is systems engineering followed by technology platform consulting and integration.

The survey also shows that most respondents, nearly 82 percent, don’t believe the 2018 mid-term congressional elections will impact their M&A strategy, while the remainder are equally split on whether the election outcome will make them or less aggressive on M&A.

Most dealmakers, 76 percent, expect moderate economic growth in the overall economy with 7 percent expecting strong growth and nearly 15 percent forecasting flat or no growth, the survey shows. It says 3 percent see a moderate contraction.

“These results are slightly less optimistic than last year, when over a quarter of respondents expected strong economic growth and no responders expected economic contraction,” KippsDeSanto says.

Another result of the survey is that 56 percent of dealmakers believe deal valuations will remain the same in 2019 versus 2018, although only 17 percent expect valuations to increase versus 48 percent in 2018. It shows 27 percent of respondents believe deal values will decrease this year versus just 3 percent who predicted a decrease in 2018.

Of those that expect a decrease in valuations this year, nearly 42 percent of respondents come from the private equity markets versus just 18 percent from corporations.

The biggest driver of M&A activity is defense spending, according to about 80 percent of respondents.