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In most industries, a pumped-up acquisition currency, terrific top-line growth and constrained capacity would bring M&A bankers running. Not in European defence, though. Traditionally, cross-border deals in particular have been hard to envisage. But the idea of consolidation is rapidly getting less outlandish.
Team America wants to retreat from its outsized security role and Europe is cobbling together cash and policies to step up. It needs to make a lot more weapons — which means it needs to raise production capacity. And with the rise of technological warfare, it needs to develop new weapons too. A more centralised approach to raising funds — and possibly even defence procurement — looks plausible as Europe seeks to get as much bang as it can for its buck.
Companies are already palling up to design multipurpose frigates and combat aircraft. MBDA offers a template. The missile group is owned by BAE, France’s Airbus and Leonardo of Italy. Recently, Germany’s Rheinmetall and Leonardo formed a joint venture to supply next-generation tanks to Italy. This sort of thing helps to optimise development spend — although a cat’s cradle of joint programmes is probably less effective than full-blown integration.
A couple of larger homegrown national suppliers might be better placed to invest to increase production capacity, too. There is very little slack in the system. Just think that the region’s suppliers took just a fifth of European procurement spending in the year after Russia invaded Ukraine. A lot of money will need to be invested for that to rise to half by 2030, as set out in the European Defence Industrial Strategy.
Moreover, the rush to re-arm means that defence companies ideally have to start pouring money into plants before government contracts come through. This is a significant risk to take for relatively small defence companies. As of now Europe’s biggest prime, the UK’s BAE Systems, is just half the size of transatlantic peer Lockheed Martin in terms of sales.
Just because a defence mega-merger makes sense, it does not mean it is going to happen. Sovereignty over research and development and intellectual property is key in defence. Different countries have different needs. And duopolies reduce competition.
But there is still a lot of reshaping to be done. Leonardo, Airbus and Thales are exploring a consolidation of their space operations. ThyssenKrupp’s warships division has reportedly attracted rivals. Private equity firm Advent is reportedly exploring options for military supplier Ultra PCS.
Defence majors should also use their inflated stock to buy up their horribly fragmented — and fragile — supply chains. Primes already hold stakes in their smaller brethren; see, for instance Leonardo’s 25 per cent stake in military sensor maker Hensoldt.
All this reshuffling is useful for policymakers — and also for sector investors. While such “competi-mate” deals may not generate the typical bounty of successful M&A, the collaboration dividend will still bring pay-offs.
Louise.Lucas@FT.com
