Inter-government plans to advance the cause for Nordic military-industrial collaboration are proving an influential force driving domestic and regional sector consolidation. This has resulted in a recent flurry of merger and acquisition (M&A) activity by leading industry players across the region.
Defense sector consolidation is being further impacted by the prospect of closer military-industrial collaboration between the Nordic and Baltic states that could lead to a much higher focus on major joint weapons systems and military equipment procurements.
Against the backdrop of Nordic-Baltic military-industrial cooperation, leading defense groups, headed by Saab, Patria and Kongsberg, are more aggressively pursuing consolidation strategies to escalate competencies and production capacities. Companies are eager to achieve a size that will enable them to better compete for larger contracts, both in a pan-Nordic and global space.
The primary objective in ongoing consolidation and M&A activity is to enhance the Nordic defense industry's competitive edge to secure big-ticket domestic and regional contracts against expected increased interest and bids from "foreign" rivals.
According to Görgen Johansson, the head of Saab's business area Dynamics, strengthening the Group's "regional footprint" was a pivotal reason for its takeover of Nordic Defence Industries (NDI), the Denmark-based mine disposal company acquired in October.
The acquisition of NDI will add significant technology and innovation value, aside from a greater regional reach, to Saab's continuing expansion in the unmanned, underwater and mine-warfare domain. Specifically, the deal will fortify Saab's capacity to design and produce disposal charge systems for the naval defense industry.
"This acquisition strengthens our position in the mine-countermeasures market and builds a foundation for continued profitable growth. Our regional footprint will be strengthened as well as our role as a global supplier of mine countermeasure solutions," said Johansson.
Nordic defense companies are also closely monitoring developments within the framework of Nordic Defense Cooperation run military-industrial programs. These NORDEFCO programs are intended to promote deeper collaboration between industry and the military in the delivery of future Nordic joint procurement contracts.
NORDEFCO is the Nordic inter-state military cooperation vehicle responsible for identifying and implementing Nordic defense cooperation programs. On the industrial side, these are largely run by organization's Cooperation Armaments unit.
In terms of regular contacts and cooperation, NORDEFCO liaises with the Joint Nordic Defense Industry Cooperation Group (JNDICG), which is headed by national defense industry associations in Sweden, Finland, Norway and Denmark.
"Nordic military cooperation is important and ongoing, and it makes sense that defense industries in the participating countries should get more involved and benefit," said Peter Hultqvist, Sweden's defense minister.
State support for a more consolidated Nordic defense sector became visible during the first half of 2016 when Kongsberg Defence & Aerospace (KDA) paid $296 million to acquire a 49.9 percent equity holding in state owned Patria Oyj, Finland's biggest defense company.
The Norway-based KDA's buy-in at Patria created a partnership with combined annual revenues of $1.6 billion. KDA's parent, Kongsberg Group, is 50 percent owned by the Norwegian state.
Post-acquisition, Patria Group CEO Heikki Allonen described Kongsberg's minority owner position as a robust pan-Nordic strategic partnership that would open up new international opportunities for the company.
"It strengthens Patria's position as a significant player in the Nordic region and the leading defense company in Finland. Patria will remain an essential part of the Finnish defense industry and security of supply going forward," said Allonen.
On the production side, the Kongsberg-Patria deal creates a partnership that includes aero-structures, armored wheeled vehicles, engine and lifecycle support, mortar systems, aircraft and helicopter assembly, ground-based air defense systems, missile systems, rocket engines (Nammo), defense communications and naval systems.
Nordic defense industry consolidation is fundamental to enabling leading national players grow to an internationally competitive size through domestic and cross-border M&A deals, said Henk Welcker, an industry analyst based in The Hague.
"Take Finland, for example. It has around 100 significant defense sector companies. Patria stands out because most firms are privately owned, relatively small in size and operate in niche areas. Finland's defense sector will show a cumulative turnover of under $1.4 billion in 2016. Around 40 percent of its output is exported. So consolidation is not just happening regionally, it's also happening domestically," said Welcker.
The domestic driver in Nordic defense sector consolidation was underlined recently when the Millog Oy-owned Senop Oy acquired the Finnish opto-electronics specialist Rikola Oy. Millog and Senop are both Patria-owned companies.
"The deal has strong domestic, Nordic and international value. Rikola's and Senop's combined expertise will improve our capacity to develop high-quality products for customers in defense, security and civilian sectors," said Mika Räty, Senop's CEO.
Senop, which produces advanced sensor technology and night vision systems, was established in January 2016 when Millog merged its Optronics Product Business with Oricopa Oy's System Integration Business area.
In May, the domestic consolidation process in Finland also saw Patria acquire a 25 percent equity stake in Silverskin Information Security Oy, a company specializing in cyber defense and security platforms.
Nordic industry consolidation will also involve non-core divestments that have a wider geographical impact. Swedish truck builder Volvo is searching for a buyer for Renault Trucks Defense. The sale may generate bids from major European players in this sector, Rheinmetall or Nexter.
"It can be expected that consolidation across the Nordic sphere will result in niche technology driven firms becoming targets for leading regional defense actors. Companies producing digitalized products and solutions are becoming more attractive in this mix," said Welcker.
Håkan Buskhe, Saab's CEO, identified the potential for future growth in demand for digitalized solutions on release of the Group's third-quarter results.
"Demand is clearly growing for cost-efficient systems and solutions that quickly increase operational capabilities. At the same time, technological development continues, with evermore digitalization and automation within the defense industry," Buskhe said.