Defense Industry Consolidation & Opportunity – Excerpt from Women in Defense Keynote Address

At the Women in Defense New England Shoreline Chapter’s 2022 Gala — hosted in partnership with General Dynamics Electric Boat — Managing Director Tess Oxenstierna addressed the history of consolidation, recent market trends, and where opportunities lie in the Defense Industry in her keynote address.

Full video transcript

This was the consolidation after the famous Les Aspin, Secretary of Defense, what’s called the Last Supper of 1993.

He brought in all the defense contractors, primes, and said, “There’s too many of you. You have to die. There’s got to be consolidation.” 

So we went from 51 prime contractors to five today.

So what happened after the first and second wave of consolidation, especially when it was prompted by the 1993 Last Supper? We then saw a lot of the primes divest their services business. Why? Because they were sub-10% percent margin.

Right, now services can be 6% to 9%, middle market 6% to 8%. So if you’re sub-10%, that’s not very much room for margin expansion.

So a lot of these businesses were spun out of the major hardware companies.

So this is what happened after the consolidation. After that wave, they then regrouped and went back to buying what was core. So more of the core.

And when I show you this one slide about who remains and what they do, you’ll see that even in satellite business, we’re moving to the next phase of commercialization. So you’ll see we have NanoSat, CubeSat, and who owns that? All these commercial guys. It’s not Boeing. So it’s a very interesting move to the commercial model.

So what’s the state of the defense industrial base today? As I mentioned, we went from 51 to 5 defense primes and you’ll see that consolidation continues. The one thing that is tapping the brakes is the cost of capital.

So when your debt is basically zero, it’s LIBOR +2, it’s like free money. And you can lever up and use that to buy companies, right? Because the arbitrage between how much the cost of that capital is and how much return you get on that company you just bought is above the cost of the debt.

So people are doing credit arbitrage. Private equity was levering up four, four+ times on EBITDA.

Now we joke in Wall Street, it’s probably not a very funny joke, but LBO — what happens when there’s no “L”? 

LBO stands for leveraged buy out. What happens when there’s no leverage? This is what’s happening in the market.

So now we get to the boring stuff. What does Wall Street think?

The markets right now, they’re jittery because there’s a credit crunch. It’s not that there’s a fundamental issue around labor, or there’s not a fundamental issue around any structural issue in the market. It’s really about credit.

And so you’ll see here, when you have the global credit crisis and you can’t borrow capital or capital becomes more expensive to deploy for M&A, for growth equity, for any investments.

Even when you talk about CapEx, where does your CapEx money come from? Yourself, your own profit. It’s harder to borrow money now.

The market’s pretty much down 60%, the M&A market. So this is global. So this is large deals. These are billion-dollar deals.

But also in the main, I would say in the US market, middle market, it’s down 50% to 60%, which is in keeping with the market.

But I spoke at the MilSat at conference in Silicon Valley, and there’s so much money sloshing in the market. There’s about $1.8 trillion of private equity dry powder that’s looking for cash, right? Looking for a deal because they’re paid to put money to work. When they don’t put money to work, that money gets pulled back and they don’t make their percentage on that.


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