Since a while we can observe a trend in the defense industry. The Big Fish are getting bigger which means they went for shopping!
Generally speaking this is quite normal. Mergers, acquisitions, take overs, consolidations – businesses as usual. The first big hit came from Lockheed Martin, about two years ago when they bought Sikorsky from United Technologies – 9 billion dollars went from one company to the other. The biggest argument for this deal was the focus on hardware, and helicopters are an essential piece of hardware in any army, and especially in U.S. Army (and other branches as well). Lockheed has decided to drop the services business and it seems like a good move. Services come and go but once you build a machine you can be nearly certain that for the next 40+ years you will have a lot of work with maintaining it. That is how things work with modern technology. The good old days of P-51 and in-house maintenance by the military will never return. The equipment is too sophisticated so the defense contractors will get more and more work. It looks like we are on a one way road, at least in this case.
United Technologies lost the helicopter business but this year bought Rockwell Collins for 30 billion dollars. When we look at it from a perspective this might be a good move for UT. They have swapped one big product for a bunch of small products which are used while building… bigger products. This means that the price tag for one sold item will be smaller but there will be more of them. Rockwell has a huge portfolio of superb avionics systems which can be integrated in a lot of platforms.
Last but not least there is Northrop Grumman wiht it’s recent buy – Orbital ATK. This allows the company to broaden it’s possibilities. Especially that that the US has to modernize it’s missile inventory and having an engine manufacturer in you portfolio can be a great asset when stepping up in a competition. Northrop can get a real boost in it’s business – the B-21 is a solid foundation and adding to it a huge missile contract would allow a steady future and further growth possibilities.
But what is the conclusion from all of those deals? Well some are afraid that big companies get too big but this might not be an issue. They tend to sell some parts of its core businesses and buy other so the sheer size of the defense companies is not an issue as it changes. The only problem would be specialization. This would be very bad for the tax payer but… as the complexity of equipment grows we might be ending up in a situation in which there are only 2-3 big players in a defense sphere and loosing a big, multi year contract would mean no more sens for the loosing company to further invest in that branch. This is the moment when the regulatory should step in. Having 4-5 companies allows a decent diversity and a group of products to choose from. To wrap this all up we live in interesting times and future contracts will tell us more about the direction the industry is heading. For instance the T-X competition might be very interesting .