By Ken Pole | August 17, 2016 Estimated reading time 8 minutes, 12 seconds.
The global aerospace and defence (A&D) industries are facing “the dawn of a new day,” which could see more consolidation through mergers and acquisitions, according to KPMG’s 2016 Global Aerospace and Defense Outlook.
Grant McDonald, the consultancy’s Ottawa-based national leader in A&D, told Skies that while Canadian companies are likely targets for takeovers, some also are trying to grow themselves to capitalize on global market opportunities.
The report, based on responses to a survey earlier this year of 76 top-tier A&D executives, mostly in Europe and the Americas, indicates that 64 per cent of companies with annual revenues of more than US$10 billion were either “very confident” or “confident” about their growth expectations. Fully 88 per cent considered growth as a medium-to-high priority for their companies.
“Change is everywhere . . . and it is creating significant opportunities for A&D players,” according to one of the report’s principal authors, Doug Gates, KPMG’s global sector chair of industrial manufacturing and global head of aerospace and defence. “Most . . . can’t deliver on shareholder expectations without doing something different.”
But their optimism could expose their operations to increased risk. “Organizations will need to think about how they drive profitable growth in new segments while . . . managing costs within slower-growth segments,” Gates explained. “Executives are going to need to stretch their comfort zones to explore new approaches and team up with new partners.”
McDonald, a self-described KPMG “lifer” who has been with the consultancy since the early 1980s, works closely with Gates and others in KPMG’s international network. He keeps his finger directly on the sectors’ domestic pulse, liaising not only with the federal government but also the two key industry lobbies: the Aerospace Industries Association of Canada (AIAC) and the Canadian Association of Defence and Security Industries (CADSI).
“We have a very splintered market in a sense; it’s hard for our companies to really play on the global stage in terms of having the size,” he said in an interview shortly after the report was released and only a few weeks after meeting with colleagues from around the world at the 2016 Farnborough International Airshow.
The evident consensus is that major multinationals “like what they see in Canada” but that many Canadian companies, particularly those at “the lower tiers of the supply chain” must be more aware of world markets and certification needs if they are to become more involved in global supply chains.
“We see a lot of that,” said McDonald, adding that the Canadian government, as well as AIAC, CADSI and others, is driving the push for a higher global profile. “The other thing that people were saying in our meetings at Farnborough was around innovation,” he said. “Canadian companies tend to be quite innovative. Maybe it’s because we have pretty good R&D benefits or programs . . . that can help to spur them on.”
He agreed there is a need for innovation but cautioned that “we can’t be all things to all people” and suggested that “we have to pick our niches.” It’s a policy that has worked well for two companies in Montreal’s aerospace cluster, CAE Inc. in the simulator and training market and Héroux-Devtek in landing gear technologies.
“We have to play to our strengths,” McDonald reiterated, and that included the possibilities presented by more collaboration between companies, something AIAC has been pushing. This consortium-type approach would see cooperation between the various aerospace clusters across the country.
He said companies do need to protect their intellectual property but argued that there are clear benefits from this “sum of the parts is greater than the whole” approach to global markets. “If you’re going to succeed long-term, don’t be so navel-gazing about it and try to do more collectively across the country or between the clusters we have.”
McDonald added that when offshore interests ask KPMG for advice, it’s often driven by a desire to get “a foot in the door in Canada.” While there might not be much interest in companies with annual earnings in the $25 to $50 million category, adding a zero might make the difference in terms of systems, strategies and potential partners.
“Canadian companies are very ambitious in trying to get to that next level . . . but not necessarily to position themselves for a sale,” said McDonald. “That might happen, but it’s really more about positioning to be part of a bigger supply chain, maybe going global in additional countries. So, yes, size does matter.”
As for KPMG’s report, the prospect of more industry consolidation has implications for military buyers. Miles McNamee, who has advised the U.S. defence and intelligence communities since 2009, pointed out in the report that as his country reduces its defence spending, global cooperation becomes the name of the game.
McNamee said that regardless of the outcome of the upcoming U.S. presidential election, his country can be expected to scale back its global military presence. This means that Canada and other allies would then be “taking a different level of ownership” in multinational missions, requiring the defence community to focus more on improved interoperability and “collaborative” platforms.
Adil Khan, KPMG’s deal advisory principal in the U.S., added that all signs suggest that the defence sector is on the cusp of a “not entirely surprising” era of more sophisticated M&As. Many of the larger players were “sitting on growing pilots of capital . . . that could be put to better use.”
McDonald said KPMG does get “a lot of requests” from foreign corporations about what might be available in Canada, particularly with a relatively weak Canadian dollar. But that tends to be easier when a company is looking to be sold. “When you have a buyer looking to acquire something, it’s tough to shake the trees and find something they want to buy.”
However, there are regulatory hurdles to overcome. “If one of the majors tried to do something significant, that’s always going to get that look-see from Investment Canada. Whether they’d say ‘no’ to it or not is an interesting question, but it’s certainly always going to be taken into account. . . . Everything is looked at on its merits.”
McDonald said he hasn’t recently heard any “scuttlebutt” about acquisition on the scale of Lockheed Martin’s US$9-billion acquisition of Sikorsky Aircraft in 2015.
“That kind of thing tends to bubble quietly until something happens,” he concluded. “From a Canadian perspective, we’re interesting because we have very few primes. We have lots of relatively good-sized subsidiaries of many of the foreign companies (and) people are certainly looking at our market and trying to decide whether they can dive in.”
