Aerospace Mergers and Acquisitions Are On The Wane

Chip Blankenship has a history of making a quick mark on the companies he joins. On Oct. 19, power- and motion-controls supplier Woodward—which Blankenship took over in May—announced a reorganization in its aerospace and industrial divisions.

“The changes we are making to our business structure and leadership will reduce complexity and improve operational performance to better serve our customers,” Blankenship says in the prepared announcement.

But those are probably not the only reasons Woodward is making the changes. The company has acknowledged at least $50 million of additional costs from supply chain disruption and labor shortfalls this year through its fiscal third quarter, which ended June 30. Investors may hear of even more costs when Woodward reports full fiscal 2022 results, expected in November.

Financial analysts at Jefferies say the reorganization is likely just the beginning of Blankenship’s remaking of Woodward as it tries to stabilize and reignite growth after the business falloff caused by the COVID-19 pandemic, as well as supply chain and workforce problems that continue reverberating across industry. “The stream-lined organization structure is likely ‘Step One’ in the right direction,” the analysts—who sat down with Blankenship in September—told their clients following the latest announcement.

Woodward is likely far from the last large aerospace and defense company to announce a business restructuring in the wake of the pandemic. The strategy of reengineering a midsize or large company—once a tool more associated with fixing a clearly struggling business—could become prevalent at even seemingly healthy companies as leaders look to prosper in the post-pandemic new-normal era.

According to the latest Accenture Commercial Aerospace Insight Report, which includes a survey of industry leaders conducted in early September, 83% of the executives say it is likely or very likely they will redesign their companies in the next 24 months to better capture market opportunities and drive performance.

“As executives work tirelessly to ramp up production rates while mitigating myriad challenges such as supply chain delivery misses, there is growing awareness that long-term strategic objectives can no longer be sacrificed,” states the Accenture report, first released to Aviation Week. “In many cases, this means redesigning how organizations operate.”

When the pandemic hit the U.S., Woodward was in the middle of a merger with composites provider Hexcel. The deal was killed in April 2020, and executives blamed the novel coronavirus—but before it struck, analysts and consultants had questioned the benefits of combining the disparate companies. To many industry observers, the proposal represented the peak of large-scale mergers and acquisitions (M&A) that dominated the last decade.

Looking ahead, indications are that such large-size, merge-for-scale combinations will be fewer and far between. Instead, observers see a growing reliance on large-scale partnerships, corporate venture capital (CVC) investments and maybe joint ventures. While major M&A may not be over, in the midterm, it could take a back seat to simple teaming.

Examples continue to be announced. Relative newcomer Sierra Space in October opened its own CVC office to facilitate strategic tie-ups with other companies. Investments will go to businesses working in human health, computing systems, telecommunications and clean energy that in turn could benefit from using Sierra Space’s planned low-Earth-orbit space station designed for research. In November 2021, Sierra Space announced a $1.4 billion Series A fundraising round, so it has money to sprinkle on strategic partnerships.

Still, no less than the largest defense prime contractor, Lockheed Martin, similarly is foregoing major M&A in favor of teaming. In October, Chairman and CEO Jim Taiclet—who took over in June 2020, after 17 years heading telecommunications provider American Tower—announced the creation of Lockheed Martin Evolve, a new office aimed at partnerships or joint ventures with midsize companies, including those outside the defense sector.

LM Evolve follows LM Ventures, the CVC office established by Taiclet’s predecessor. In his time, Taiclet has doubled the CVC office’s authorized investment to $400 million. Lockheed also will continue to buy providers of critical supply chain parts as needed, he says.

The pandemic’s long-term effects have yet to emerge fully, but already industry sees two examples of business- and operating-model changes that have sprouted because of it. Expect more larger-scale restructuring, fewer larger-scale mergers and more partnerships.