WASHINGTON — The head of the largest US aviation trade group expects to see a "steady stream" of mergers and acquisitions activity in the defense sector going forward.
However, that will largely be in the mid to small tier of companies and not among the prime contractors, predicted Aerospace Industries Association (AIA) head David Melcher.
"There's been a little bit more of that kind of activity in the last few years," Melcher said in a June 29 interview. "There was not much of it three, four, five years ago because there was too much uncertainty in the defense marketplace. Nobody knew where budgets were really going to end up. Now there's a little bit more certainty.
"I think companies are consolidating because it's a way to continue probability and find growth paths. I think you're going to see a steady stream of mergers or, in some cases, spinouts."
Certainly, companies have looked in recent years to spin off their technical services business, something for which Melcher has had a front row seat. As president of ITT's defense arm, he was there when ITT spun that group out to create Exelis in 2011. Four years later, he helped manage the merger between Exelis and Harris.
He said to expect greater consolidation among those services companies, but that the primes are unlikely to see much action.
That will be welcome news at the Pentagon, where acquisitions head Frank Kendall has been openly concerned that any consolidation at the prime level could create a dangerous shortage of suppliers for the department.
Kendall was concerned enough about that possibility that he began working with Congress on draft legislation to make sure mergers were more difficult. However, he dropped that push after receiving assurances from the Treasury and Commerce departments that the Pentagon's concerns would be taken into any consideration of future mergers.
For his part, Melcher doesn't expect future pushback from the Pentagon toward mergers and acquisitions among the mid- or small-tier firms.
Email: amehta@defensenews.com
Twitter: @AaronMehta
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.