AIRPLANES IN SKY
By Published On: September 19, 2024

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INDUSTRY TRENDS

Interest Rates Continue to Influence M&A

A&D M&A transactions in the first half of 2024 have increased by approximately 19% from the second half of 2023, indicating that the uncertainty from rising interest rates has dissipated as interest rates have stabilized. With the Fed committed to lowering rates, even nominally, in September, we anticipate the number of transactions to increase in H2 2024 amid lower cost of capital and rising investor confidence. High interest rates continue to have a dampening effect on M&A values where significant third-party financing is used. Marginal M&A deals continue to have trouble gaining financing because of this and tougher credit approvals.

Space: The New (and Booming) Frontier

The space economy is expected to be worth $1.8 trillion by 2035 as satellite and rocket-enabled technologies become increasingly prevalent. In addition, hypersonic weapons and laser weapons will be byproducts of this space expansion. As a result, there is a significant race to develop and own the technologies that will fuel the space race. With an estimated CAGR of 9% in this segment, we anticipate continued M&A activity with premium valuations for space companies.

Challenges in Global Supply Chains

A&D supply chains are both complex and heavily regulated, which makes them very inflexible when problems arise. Currently, the A&D industry is dealing with shortages of parts and components, which is in part due to the aftermath of the COVID-19 pandemic. In aviation specifically, demand plummeted because of the travel bans, but now that lockdowns are lifted and people have resumed normal activity, demand has shot up. Manufacturers are left struggling with unevenly balanced supply and demand. In addition, inflation has driven up the costs of raw materials, which is a complication for many suppliers and manufacturers. The importance of a diverse, flexible supply chain cannot be overstated, and fortifying it should be a top priority going forward.

Labor Shortages

Post-COVID, the aerospace industry has been struggling with a heavily increased demand for talent across all aspects of the supply chain. It is a critical issue, because having a highly skilled, capable workforce is essential for companies to operate at optimally competitive levels. Airlines have been successful in hiring more pilots to manage the surge in travel post-pandemic, but there is still a high demand for workers in sectors such as aircraft construction and repair. While the use of automation and advanced digital technologies is increasing, the aerospace industry is continuously dealing with this labor shortage, especially with more advanced, specialized workers.

Forecasts from AAR Corp. indicate that the global aviation market will require 690,000 new mechanics over the next two decades to sustain the global fleet. This substantial demand, coupled with the ongoing need for thousands of aerospace engineers annually, necessitates innovative solutions.

SIGNIFICANT NEWS

Air Force’s next nuclear missile at risk after costs spike
By Stephen Losey
January 19, 2024, Defense News

BlackRock unveils aerospace and defence ETF
By Laura Gibbons
February 9, 2024, ETF Stream

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Brent Costello, a FOCUS Senior Advisor, has more than 30 years experience as an investment banker and mergers and acquisition and corporate finance lawyer. He has represented a wide range of clients in cross-border and domestic transactions, including small to mid-capitalization enterprises and public and private companies that also include family-owned entities. His clients represent various industries, including manufacturing and distribution, pharmaceutical, entertainment, aerospace, information systems, publishing, insurance, and hi-tech.