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In the decade leading up to 2020, U.S. Aerospace and Defense experienced tremendous success and growth as widespread M&A activity focused on horizontal integration and scalability in an effort to meet expected demand. Despite minor road bumps in 2019, such as the grounding of Boeing’s 737 MAX and faltering consumer confidence amidst the trade wars, the outlook for 2020 was cautiously optimistic.

This was, of course, before COVID-19 spread across the globe and singlehandedly redefined the industry and its business activities.

The resulting shock of the novel coronavirus had a pronounced effect on commercial aerospace as leisure and business related travel dried up. This spelled liquidity issues for an industry that is generally highly capital intensive. As companies in the space scrambled to restructure balance sheets and buy time, the ripple effect carried on throughout the supply chain. With new production on hold and fewer flights altogether, suppliers, OEMs, and MROs dealing with commercial aerospace all saw a sharp decline in revenue. In order to survive, these companies will need to strategize and adapt as the timeframe for a recovery is uncertain.

On the other hand, defense is also facing its share of challenges. Despite the stability of military spending and lack of demand shocks, the reality is that many of the suppliers that work in defense also participate in the commercial space. As these suppliers face additional financial risk, defense companies will need to keep careful watch on their supply. Furthermore, defense is now contending with the added element of election risk. Presidential candidate Joe Biden has hinted at a hefty reduction in defense spending should he be elected. While the sub-industry has not been as overtly affected as commercial aerospace, the issues ahead will require navigating carefully with deliberate and effective measures.

As aerospace and defense companies faced their respective challenges, M&A related activity faced a severe decline over the recent months. For six consecutive weeks between May 8th and June 22nd the industry experienced no transaction volume.

The good news is that M&A activity is anticipated to increase in the latter half of 2020 as strategic buyers reassess their business activities and financial buyers look to get a better handle on the risks and projected performance of the industry. It is likely that in the near future strategic transactions will shift away from horizontal scaling and place a greater emphasis on vertical integration, delivering value in an effort to secure supply chains and hedge against competition. With record levels of dry powder, it is also probable that private equity firms will look to flex their purchasing power within the space as they search for quality platforms to acquire. Given the current M&A climate and extended deal timeframe, it may be prudent for companies looking to sell or enter a partnership to lay the groundwork now and contact a trusted broker.