Alignment of Commercial and Military ISR Technology Expected to Drive Deal Activity in 2023
Command and Control Market Primed For Growth Due to JADC2 Opportunities
The intersection of commercial and government uses of intelligence, surveillance, and reconnaissance (ISR) systems is projected to expedite significant growth in the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) sector in 2023. The progressive development of ISR systems by commercial players has garnered increased interest from the U.S. Department of Defense (DOD), intelligence agencies, and civil law enforcement agencies. This has been evidenced by the hiring of commercial ISR companies as outsourced contractors for the public sector. Wide-spread availability and use of geospatial intelligence provided by low-earth-orbit (LEO) satellites and unmanned aerial vehicles (UAVs) have driven innovation in commercial ISR solutions. As a result, commercial LEO observation satellites with electro-optical (EO) sensors have been increasingly utilized by the U.S. government and military to deliver real-time mapping imagery and geospatial intelligence to warfighters and national security decision makers. The alignment of commercial and military ISR users is likely to lead to a proliferation of merger and acquisition (M&A) activity in 2023. Additionally, the DOD focus on the implementation of the ambitious Joint All-Domain Command and Control (JADC2) program across the U.S. Army, Navy, and Airforce military branches has continued to provide contract opportunities for systems integrators and boost growth in the global Command and Control market.
The market continues to witness the commercialization of the ISR segment and the Command and Control market, especially in the space domain, bringing persistent imagery solutions for broader applications such as climate change monitoring, while still providing open source intelligence in military conflict zones.
Commercial and Military Alignment Drives Contract Opportunities
The U.S. government has provided ample funding and contracts for commercial satellite imagery and procurements, cementing its investment in commercial ISR systems. While most commercial ISR contract and funding information for the Office of the Director of National Intelligence (ODNI) and the Central Intelligence Agency (CIA) has been classified by the DOD, five federal civilian departments and agencies currently have contracts with commercial ISR and satellite companies, according to a report by the U.S. Government Accountability Office (GAO).1 NASA in particular has spent $75.7 million on contracts for commercial satellite imagery since 2018, according to the GAO report.
Congress and the GAO have pushed the Pentagon to develop a more concrete commercial procurement plan for increased adoption of commercial satellites. Capstone Partners’ Managing Director, Tess Oxenstierna, recently joined representatives from Maxar Technologies (NYSE:MAXR) and Planet Labs (NYSE:PL) on the 3D Mapping for Government and Military End Users panel at the Satellite Show 2023 in Washington, D.C. to discuss innovation in commercial satellite 3D mapping technology. The panel highlighted surging demand from the military and government agencies for accurate and multi-dimensional data and intelligence as a main factor in visual data collection advancements. Additionally, the expansion of satellite coverage and intelligence capabilities by Russia and the People’s Republic of China have added additional incentives to bolster domestic ISR capabilities. As a result, the global market size for Airborne ISR is projected to reach $33.4 billion by 2030 through a 5.7% compound annual growth rate (CAGR) between 2022 and 2030, according to Research and Markets.2 Additionally, the Space-based C4ISR market is projected to reach $4.3 billion at a CAGR of 5% between 2022 and 2031, with the ISR segment projected to capture the largest market share, according to Research and Markets.3 As commercial ISR contract decision making transitions to the DOD and the IC, the market for commercial ISR is expected to be robust under the fiscal year (FY) 2023 DOD budget, with $35.5 million earmarked for LEO satellite capability development, $55.7 million for command support equipment procurements including $6.5 million for C4ISR equipment procurements, according to the National Defense Authorization Act.4
Global Command and Control Market Receives Boost From Great Power Competition
The DOD’s ambitious JADC2 program, an effort to connect all U.S. military C4ISR systems, has sparked potential growth in the global Command and Control market. Capstone’s September 2022 C4ISR sector update highlighted the DOD’s implementation plan for JADC2, specifically the development of sensor technology and connecting remote sensing satellites across all U.S. military infrastructure. The scope of the project requires the implementation plan to be split between the Army’s Project Convergence, the Air Force’s Advanced Battle Management System (ABMS), and the Navy’s classified Project Overmatch. In response, the PRC has unveiled plans for its own interlinked military construct known as Multi-Domain Precision Warfare (MDPW). Similar to JADC2, MDPW relies heavily on interlinked command and control systems including data collection and processing, detection, and communication in order to identify vulnerabilities in an adversary’s operational systems.
The buildup of sophisticated and interlinked command and control systems by the world’s two largest competing powers is likely to facilitate growth in the global Command and Control market. In 2022, the global Command and Control market reached $36.3 billion, and is projected to reach $45.9 billion by 2028 at a CAGR of 4%, according to Research and Markets.5 The enormous scope of JADC2 has also heightened demand for more capital to be invested in command and control systems. The Navy reportedly requested $195 million for Project Overmatch, the Navy’s highly classified contribution to the JADC2 program, in FY 2023, $73 million more than they requested the prior year, according to the Navy Times.6 On the commercial side, the DOD and the Air Force have continued to prioritize relationships with sector players as an essential component to the development of the ABMS. This includes a $112 million contract awarded to Science Applications International Corp (SAIC) (NYSE:SAIC) in January to develop the Cloud Based Command and Control (CBC2) system for the ABMS, according to a press release.7 The DOD’s focus on JADC2 implementation has not only primed the global Command and Control market for substantial growth, but the sheer scope of the program is expected to continue breeding lucrative contract opportunities for systems integrators.
C4ISR Transaction Volume Remains Steady as Buyers Look for Established Players
M&A volume in the C4ISR sector remained healthy in 2022, with 66 transactions announced or completed, matching pre-pandemic levels. Transaction activity in year-to-date (YTD) 2023 has moderated, with 11 deals announced or completed in an increasingly challenging macroeconomic environment. The majority (66.6%) of transactions in 2022 were completed by strategic buyers, with public strategic buyers accounting for 34.8% of total transactions and private strategic buyers accounting for 31.8%. Strategic buyers have targeted companies with existing C4ISR infrastructure, allowing access to a broader military and commercial customer base and the ability bypass the costs of building proprietary technology.
Private equity maintained a consistent presence with 22 total transactions in 2022, prioritizing add-on acquisitions (21.2% of total transactions) over direct platform investments (12.1%). Private equity largely opted to pursue buy-and-build strategies in 2022 due a high interest rate environment in the U.S. that restricted sponsors’ ability to cheaply finance large scale transactions. Increased clarity over the Federal Reserve’s terminal interest rate in the coming months will likely support greater private equity investment activity in the sector.
Demand for ISR Capabilities and Command and Control Systems Drives High Valuations
Strategic and financial buyers in the sector have acquired companies with ISR and command and control capabilities in order to secure JADC2 implementation and satellite imagery contracts. The value of these systems has been reflected in the premiums buyers have paid for companies with established C4ISR infrastructure. Select transactions are outlined below.
- Advent International to Acquire Maxar Technologies (December 2022, $6.5 Billion) - Global private equity firm Advent International announced its acquisition of space solutions and geospatial intelligence provider, Maxar Technologies (NYSE:MAXR) in December 2022 for an enterprise value of $6.5 billion, equivalent to 3.7x EV/Revenue and 14.2x EV/EBITDA. Under the terms of the agreement, Advent has agreed to acquire all outstanding shares of Maxar common stock in a take-private deal for $53.00 per share in cash, according to a press release.8 This represents a premium of approximately 129% of Maxar's closing stock price of $23.10 on December 15, 2022, an approximate 135% premium to the 60-day volume-weighted average price prior to the announcement, and a premium of approximately 34% over Maxar's 52-week high, according to the press release.
Maxar is expected to benefit from the significant investment provided by Advent, allowing the company to accelerate its next-generation satellite technologies, including its Legion satellite constellation. The acquisition is also expected to enhance Maxar's Earth Intelligence and Space Infrastructure business with select investments in machine learning and 3D mapping technologies. Advent has a recent historical record of allocating significant capital in the space, including $28 billion invested across the Defense, Security, and Cybersecurity sectors in the past three years, according to the press release. In addition, Advent has extensive expertise in growing portfolio companies with satellite and defense capabilities that serve the U.S. government and its allies across the globe. "We will prioritize Maxar's commitment as a core provider to the U.S. defense and intelligence communities, and allies, while providing Maxar with the financial and operational support necessary to apply its technology and team members even more fully to the missions and programs of its government and commercial customers," said David Mussafer, Chairman and Managing Partner of Advent in the press release.
- L3Harris Technologies Acquires Viasat Inc.'s Tactical Data Links/Link 16 Network (October 2022, $1.9 Billion) - L3Harris Technologies (NYSE:LHX), a leading aerospace and defense technology company, acquired Viasat's (Nasdaq:VSAT) Tactical Data Links (TDL)/Link 16 network of satellites in October 2022 for an enterprise value of $1.9 billion, equivalent to 4.9x EV/Revenue. The TDL network is a product line consisting of the Link 16 Multifunctional Information Distribution System (MIDS) platform and voice and data communications terminals. The Link 16 space assets, a constellation of LEO satellites and associated terminals, are installed in more than 20,000 U.S. and allied platforms around the world, according to a press release.9 The TDL product line is also comprised of 450 employees and generates $400 million in annual sales. The acquisition was funded with a combination of cash and debt capital and includes a net present value of ~$350 million in tax benefits.
Prior to this transaction, L3Harris had secured several JADC2 prime contracts including a contract to provide the backbone of Project Overmatch's architecture and integrated fires capability, and a contract to provide the digital infrastructure for the ABMS. The acquisition of the TDL product line is expected to expand L3Harris' resilient communication and networking capabilities, achieving broader end-to-end, sensor-to-shooter connectivity across multiple domains. "This acquisition is part of our strategic effort to ensure operators have access to the most advanced, multi-function JADC2 solutions available. Viasat's TDL product line naturally aligns with our proven communications capabilities, and we are excited to partner with our customers and coalition allies as we modernize the Link 16 enterprise," said Christopher Kubasik, L3Harris CEO and Chairman, in the press release.
"Big 5" Contractors Buoy Public Company Trading Multiples
Leading public companies in the sector have demonstrated valuation resilience in a less than optimal macroeconomic environment. The average last twelve-month (LTM) EBITDA trading multiple in Capstone's C4ISR Public Company Index has amounted to 17.1x EV/EBITDA, significantly outpacing the S&P 500 average of 13.2x EV/EBITDA as of March 21, 2023. Opportunities for C4ISR applications in the Russia-Ukraine war and the proliferation of JADC2 contracts have contributed to top line growth for the "Big 5" defense contractors, which include Lockheed Martin (NYSE:LMT), Raytheon Technologies (NYSE:RTX), Boeing (NYSE:BA), Northrop Grumman (NYSE:NOC), and General Dynamics (NYSE:GD). Northrop Grumman, the fourth largest defense contractor globally by revenue, attributed 26.8% ($10.4 billion) of its 2022 revenue to its Mission Systems segment which includes C4ISR systems, radar, EO and infrared sensors, and advanced communications, according to Northrop Grumman's January 2023 investor presentation.10
To discuss sector M&A activity, provide an update on your business, or learn about Capstone's wide range of advisory services and C4ISR sector knowledge, please contact us.
U.S. Government Accountability Office, "National Security Space: Overview of Contracts for Commercial Satellite Imagery," https://www.gao.gov/assets/gao-23-106042.pdf, accessed March 6, 2023.
Research and Markets, "Airborne Intelligence Surveillance and Reconnaissance (ISR): Global Strategic Business Report," https://www.researchandmarkets.com/reports/4845770/airborne-intelligence-surveillance-and, accessed March 7, 2023.
Research and Markets, "Space-based C4ISR Market - Growth, Trends, COVID-19 Impact, and Forecasts (2022-2031)," https://www.researchandmarkets.com/reports/4515683/space-based-c4isr-market-growth-trends-covid#src-pos-3, accessed March 7, 2023.
House Armed Services Committee, "National Defense Authorization Act," https://docs.house.gov/billsthisweek/20221205/BILLS-117hres_-SUS.pdf, accessed March 6, 2023.
Research and Markets, "Command and Control System Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2023-2028," https://www.researchandmarkets.com/reports/5732820/command-control-system-market-global-industry#tag-pos-10, accessed March 7, 2023.
Navy Times, "New in 2023: Project Overmatch heads to sea," https://www.navytimes.com/news/your-navy/2023/01/05/new-in-2023-project-overmatch-heads-to-sea/, accessed March 8, 2023.
SAIC, "SAIC Receives $112M Contract To Deliver Cloud Based Command and Control," https://investors.saic.com/press-releases/press-release-details/2023/SAIC-Receives-112M-Contract-to-Deliver-Cloud-Based-Command-and-Control/default.aspx, accessed march 8, 2023.
Maxar Technologies, "Maxar Technologies To Be Acquired By Advent International For $6.4 Billion," https://www.maxar.com/press-releases/maxar-technologies-to-be-acquired-by-advent-international-for-6-4-billion, accessed March 9, 2023.
L3Harris Technologies, "L3Harris To Acquire Viasat's Tactical Data Link Business Expanding JADC2, Resilient Network Focus," https://www.l3harris.com/newsroom/press-release/2022/10/l3harris-acquire-viasats-tactical-data-link-business-expanding-jadc2, accessed March 9, 2023.
Northrop Grumman, "Northrop Grumman Overview," https://investor.northropgrumman.com/static-files/46f9df8a-dcfa-42b7-b852-3718abe5e9d0, accessed March 9, 2023.
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