WASHINGTON — After two relatively active years, the tumult of a presidential election year may stifle the mergers and acquisitions market in the defense sector during 2016.
Speaking at a defense industry outlook event co-hosted Tuesday by Squire Patton Boggs and Bloomberg BNA, Razmig Arzoumanian, head of Lincoln International’s aerospace and defense group in North America, said the spending caps put into place by 2011’s Budget Control Act created a lot of uncertainty in corporate board rooms.
“The major change you’ve seen over the last couple of years is we came out of sequestration, there was better clarity on the budget,” he said. “As that got lifted, you saw finally people being able to move their chess pieces around, and execute on transactions they had been planning for some time.”
In 2015, a record-setting $3.8 trillion in total deals (including non-defense deals) closed last year. In the defense sector, M&A activity remained relatively flat from 2014, which saw less than $35 billion of transactions.
Public markets have also warmed to the earnings stability offered by defense stocks, further empowering defense firms to make significant transactions, he said.
“The combination of those two things really unleashed the major trend of M&A you saw happening over the last few years,” he said.
Robert D. Kipps, managing director at KippsDeSanto & Co., agreed that budget clarity and lower budget deficits helped spur M&A activity in recent years. But he doesn’t see that momentum carrying over into 2016.
“I don’t think there’s going to be an enormous amount of activity this year, in an election year,” he said. After a new president is elected, perhaps the new administration and Congress can work towards a more rational kind of planning on defense budgets, instead of the one- or two-year deals favored of late, he said.
“I’m hopeful that at some point, the actual needs are going to replace the bickering and some of the other issues that have held things up,” he said.
Three former members of Congress who are now members of Squire Patton Boggs’ public policy practice voiced little hope for a long-term budget agreement happening this year.
Former Sen. John Breaux, D-La., noted the scarcity of work days on the legislative calendar. Throw in the chaos of a presidential election and the vacancy on the US Supreme Court caused by Justice Antonin Scalia’s death, and there’s little room for error.
“The time factor they’re going to have to do a budget and appropriations process for the remainder of the year, you might as well go ahead and do the CR [continuing resolution] now,” he said. “I don’t know how they’re going to get this done.”
Former Sen. Trent Lott, R-Miss., expressed hope that the defense budget, specifically the overseas contingency operations fund, could be increased by as much as $20 billion to address national security needs.
But Breaux questioned whether Congress could add to the defense budget, given its current political polarization.
“You’re not going to get an increase in defense spending of the magnitude that Trent was saying is needed without [Maryland Democratic Sen.] Barbara Mikulski saying, ‘Parity, parity, parity,’” and demanding an equal increase to non-defense discretionary spending, Breaux said. Fiscal conservatives in the House of Representatives won’t allow that to go through, he said.
Former Rep. Jack Kingston, R-Ga., noted that GOP defense hawks want the Pentagon’s budget to be as high as $649 billion, although they would accept $628 billion. Republican budget hawks in the House of Representatives would slash that number to $550 billion, well below the $582.7 billion budget request submitted by the Department of Defense earlier this month.
Kingston said House Budget Committee chairman Tom Price, R-Ga., has asked authorizing committees to ready potential cuts to entitlements that could offset an increase in defense spending.
“He’s optimistic they’ll get a budget out of the House, but the Senate has basically deemed the Bipartisan Budget [Act levels] as where they’re going to be,” Kingston said.