The big U.S. defense companies have used piles of cash to increase share buybacks and dividends. Now they're going to move ahead on mergers and acquisitions, say analysts who follow the industry.
"This is the early stage of defense M&A activity," said Tess Oxenstierna, managing director of Headwaters MB, an investment banking and advisory firm that specializes in aerospace and defense. "What's happened in the last 12 to 18 months is an uptick. There's $2 trillion of cash sloshing around in the aerospace/defense market."
Consolidation among the major weapons makers — the so-called primes — is unlikely, because the Pentagon wants to ensure competitive bids for contracts. But experts say investors should look for deals involving lower-middle-market businesses, including some with hot niches such as cybersecurity, intelligence analysis and surveillance. Also, unmanned aerial vehicles, both strategic and tactical, are expected to see more M&A.
"You're going to see some of the cash that was used to buy back stock go towards M&A," said Joseph DeNardi, a defense industry analyst at Stifel.