U.S. defense firms prepared for consolidation: BAE

By Andrea Shalal-Esa

WASHINGTON (BestGrowthStock) – U.S. arms companies are far better prepared for a new wave of consolidation than for the last big contraction in the 1990s, and are responding quickly to mounting pressures on defense budgets, a top executive with the U.S. unit of Britain’s BAE Systems Plc (BAES.L: ) said.

“Many of us cut our teeth on this in the early 1990s and everybody is getting better prepared this time because of what they experienced the last time,” Larry Prior, executive vice president of the service sectors at BAE’s U.S. unit, told Reuters at the Association of the U.S. Army conference.

Prior, a retired Marine Corps intelligence officer, joined BAE Systems in July after stints in leadership positions at ManTech International Corp (MANT.O: ) and Science Applications International Corp (SAICI.UL: ).

BAE is aggressively reshaping its portfolio, selling a platform solutions business valued by analysts at up to $2 billion and actively targeting acquisitions in intelligence and cybersecurity, electronic systems and readiness and sustainment of existing weapons.

Unlike the last big wave of consolidation in the 1990s, which was sparked by a downturn in spending after the end of the Cold War, many defense companies now have much better data on their financial performance and margins, Prior said.

He also cited “bold” moves by many companies like BAE and Lockheed Martin Corp (LMT.N: ) to downsize management ranks, and said he was struck by how quickly companies are responding to the prospect of flat or declining spending after years of double-digit growth.

“Any time you take a rapid growth rate to flat, it’s got a shock effect,” he said, adding his view that consolidation of mid-tier defense companies is “absolutely essential.”

“You’re also going to see generational turnovers,” Prior said, noting the advanced age of the founders of several second-tier companies, including George Peterson at ManTech, Ernst Volgenau at SRA International Inc (SRX.N: ) and Jack London at CACI International Inc (CACI.N: ).

Prior declined comment on reports that BAE had informally approached ManTech about an acquisition, but noted that Peterson had repeatedly told the market he was not interested in selling the company.

He said Peterson is healthy now at 75, but could change his mind about selling at some point over the next 10 years.

Across the industry, defense companies like BAE are reshaping their portfolios to have “the firepower” to make larger acquisitions, he said, noting that the last consolidation included both sell-off strategies and big acquisitions.

“You rarely see people benefiting from a pure hunker down.” he said. “You’re either on the sell side or the buy side when you come to a stressed market.”

In addition to eyeing acquisitions, BAE and other large prime contractors are also positioning themselves to capture smaller orders while still working to capture the smaller number of big projects up for grabs, Prior said.

Looking down at the BAE booth at the AUSA show, Prior said, “They’ve covered the waterfront with solutions.”

(Reporting by Andrea Shalal-Esa, editing by Gerald E. McCormick)

U.S. defense firms prepared for consolidation: BAE