BAE Systems could go on prowl as defense cuts loom

By Soyoung Kim and Andrea Shalal-Esa

NEW YORK/WASHINGTON (BestGrowthStock) – BAE Systems Plc (BAES.L: ) could be poised for a major buying spree in the U.S. defense sector as Europe’s top defense contractor chases new growth in the face of looming spending cuts.

The pullout of U.S. troops from Iraq and impending cutbacks in traditional weapons have sparked a wave of dealmaking among defense contractors rushing to get deeper into the fast-growing world of cyber warfare and find other sources of revenue.

That’s helping drum up interest in mid-sized defense technology companies like ManTech International (MANT.O: ), which had been approached in the past year by a series of potential bidders including BAE, people familiar with the matter said.

BAE Systems is looking at acquisitions to expand in three core areas: intelligence and cybersecurity; readiness and sustainment of existing weapons systems; and electronic systems; Linda Hudson, chief executive of the company’s U.S. unit, told Reuters.

“The strategy is pretty straightforward. We’ve decided where we’re going to place our bets and we are actively in an acquisition mode,” Hudson said in an interview on Wednesday.

She said the focus was on second-tier companies that were on the market at the moment, but said she could not rule out a larger multibillion dollar acquisition.

“We see acquisition strategies in this environment being more a ‘string of pearls’ approach as opposed to one huge-type move, but anything is possible, we’ve not limited ourselves by targeting a dollar value in particular,” Hudson said.

BAE was among several firms that approached information technology services provider ManTech about a potential takeover but ManTech CEO George Pederson rebuffed BAE’s informal approach earlier this year, people familiar with the matter said.

Computer Sciences (CSC.N: ) and Raytheon (RTN.N: ) had also expressed interest in ManTech in the past, the people said, asking not to be named because the discussions were private. BAE, ManTech, Computer Sciences and Raytheon all declined to comment.

ManTech provides technologies and solutions for critical national security programs for the intelligence community and the Defense Department, including cyber security, intelligence operations and network protection. SAIC Inc (SAI.N: ) and CACI International (CACI.N: ) are its rivals for that.

Companies offering high-end technical defense services and cyber warfare capabilities have become more attractive to potential buyers given declining budgets for tanks, planes and other hardware in the United States and Europe.

“The trend right now is not weapons platforms,” defense analyst Jim Sherwood at GovIA said.

Instead buyers are clamoring for cybersecurity companies as well as those active in command, controls and communications; intelligence, surveillance and reconnaissance: the rare bright spots in an industry facing the first major cuts since the September 11 hijacking attacks in 2001.

Deal volumes in the global aerospace and defense industry are up 87 percent to $5.8 billion so far this year, compared to $3.1 billion during the same period in 2009, according to Thomson Reuters data as of October 12.

SERVICES FIRMS IN FOCUS

Most of the defense deals in coming months are likely to be in the $500 million to $1.5 billion range, with mid-size firms representing the bulk of potential targets, bankers said.

Among names making the rounds, Applied Signal Technology (APSG.O: ) has a market value of $340 million, Cubic Corp (CUB.N: ) has $1.1 billion, American Science & Engineering (ASEI.O: ) $700 million.

Mega-mergers are rare in the industry because the Pentagon wants competition. The last sizable deal was the $5.5 billion purchase of DRS Technologies by Italy’s Finmeccanica SpA (SIFI.MI: ) in 2008.

BAE Systems, on the other hand, has the drive and financial wherewithal to do larger deals in the services area, people familiar with the firm said.

BAE hired former ManTech president Larry Prior as executive vice president in charge of service sectors in July — a strategic move that underscored its corporate reshaping — and bought L-1 Identity’s (ID.N: ) government consulting business for about $300 million in September.

“They feel like they have to do M&A to grow that business quickly. It’s hard to do it organically,” one source said.

As it shifts focus to services and maintenance, BAE is selling some of its U.S. component manufacturing businesses.

Hudson said BAE was seeing robust interest in its platform solutions unit, which some analysts say could fetch up to $2 billion. She declined to predict if a deal could come this year or to name any companies that had expressed interest.

“It’s performing very, very well, and we expected to have a lot of interest,” she said. “The price will be what the market dictates it will be.”

Meanwhile, Boeing (BA.N: ) has been another active dealmaker in the U.S. defense sector and bankers expect the company to continue its shopping spree as it seeks to counter potential headwinds on defense revenues. Boeing has already made half a dozen deals in the cybersecurity area, including its $775 million buy of Argon ST this year.

Major rivals such as Lockheed Martin (LMT.N: ) and Raytheon are better positioned for the changing environment and have been less aggressive in dealmaking, but they could still be dragged into the process if rivals act.

“One thing that happen when a big company starts making these moves, most of the other players get drawn in fear of losing strategic advantage. You can’t really stay out,” one of the sources said.

(Reporting by Soyoung Kim and Andrea Shalal-Esa; Editing by Phil Berlowitz)

BAE Systems could go on prowl as defense cuts loom