Aerospace Consolidation Expected to Continue in 2002, According to Analysis in Aviation Week & Space Technology.

Business Editors

NEW YORK--(BUSINESS WIRE)--Nov. 30, 2001

The intense struggle for survival that has defined the aerospace/defense industry for most of the last decade will continue unabated in 2002 and may

actually intensify in the next few years, according to an analysis in the December 3 issue of Aviation Week & Space Technology.

Excess capacity, price pressures and financial considerations are apt to trigger a broad restructuring of the commercial aviation supplier base as a result of a sharp drop in aircraft demand, according to some merger-and-acquisition (M&A) specialists interviewed by AW&ST. Additionally, original equipment manufacturers (OEM) are expected to use the downturn to further squeeze suppliers for price and other concessions, driving some from the business or into the arms of would-be buyers.

The defense side of the business may undergo significant restructuring of its own in the near-term, but for very different reasons. Non-traditional threats and acute homeland security issues have quickly driven force modernization to the top of the U.S. agenda. With the demand for weapons systems and other equipment looking stronger than it has since the end of the Cold War, many defense contractors will feel compelled to broaden their product offering and expand their size to become more competitive through increased economies of scale, said AW&ST.

Worldwide, the industry will become even more global as transatlantic deals increase and companies forge more strategic alliances. "There are European companies who aren't rushing to join a pan-European conglomeration," said Steve C. Grundman, who leads the aerospace and defense consulting practice of Boston-based Charles River Associates Inc. "Instead, they are looking for opportunities to establish, and in some cases broaden, their U.S. footprint to better compete for important defense contracts," Grundman told AW&ST.

According to the magazine, near-term acquisitions will be concentrated among small-and medium-size companies. However, there also will be some multibillion-dollar deals involving major systems integrators. For example, TRW is being courted by a host of major suitors who would like to acquire its electronics business. General Dynamics Corp. is far from done. Neither are the U.K.'s BAE Systems or Airbus' parent EADS, both of which are seeking to expand their U.S. presence.

AW&ST also cites Northrop Grumman Corp., which purchased Litton and Newport News Shipbuilding within the last 12 months, to make further moves. And, $2-billion L-3 Communications, widely considered a prime candidate to double its size through a single purchase at any time.

In addition, Lockheed Martin Corp., itself a product of no fewer than 17 acquisitions since the early 1990s, has all but recovered from financial difficulties of two years ago and is capable of rejoining the consolidation fray at any time. Raytheon Co. is regaining financial flexibility as its debt declines. Soon, it will be in a position to consider small acquisitions that complement existing businesses.

"Aftermarket and technical services are two segments ripe for such a shakeout," said Brad Meslin, managing director of CSP Associates Inc., a Boston-based aerospace/defense advisory firm. "While the maintenance, repair and overhaul (MRO) sector is less sensitive than new aircraft production to macroeconomic trends - such as those now hammering the OEMs - it has weakened in recent months as airlines have deferred some elective MRO work, brought other services in-house and slowed aircraft utilization rates," he told AW&ST.

M&A specialists expect more capital to become available for private equity investments in 2002, according to the magazine. Inflated expectations by sellers and investors caused valuations of defense properties to climb significantly higher in the last year. That discouraged private equity sponsors, but with interest rates at their lowest level in 30 years, that is expected to improve. Meanwhile, aerospace/defense companies are accessing the public capital markets with astonishing success. In 2001, U.S. firms raised more than $4.5 billion through public equity offerings, more than four times as much as the previous year and nine times the amount raised in 1999, according to Credit Suisse First Boston.

Aviation Week & Space Technology is the world's leading aviation and aerospace industry magazine, covering technology, business and operations in the commercial, military and space markets for more than 104,000 paid subscribers (375,000 readers) in 130 countries. It is the cornerstone of the Aviation Week division of The McGraw-Hill Companies. With nearly 50 products and services and an audience of more than 1 million professionals and enthusiasts, Aviation Week is the largest multimedia information provider to the global aviation and aerospace industry. Its web portal, www.AviationNow.com, offers the industry's most comprehensive real-time news, professional information and e-business features.

Founded in 1888, The McGraw-Hill Companies is a global information services provider meeting worldwide needs in financial services, education and business-to-business information through leading brands such as Standard & Poor's, BusinessWeek and McGraw-Hill Education. The Corporation has more than 300 offices in 33 countries. Sales in 2000 were $4.3 billion. Additional information is available at www.mcgraw-hill.com.

EDITORS NOTE: Senior Business Editor Tony Velocci is available to provide background information and/or interviews on the outlook of aerospace industry.