Contractors and industry observers say they expect mergers and acquisitions to continue and even potentially accelerate in 2018.
This year brought a number of deals, including Northrop Grumman's plan to acquire Orbital ATK and Boeing's acquisition of Aurora Flight Sciences. Additionally, DXC Technology announced it will combine its U.S. public sector unit with Vencore and KeyPoint Government Solutions, while NCI was acquired by a private-equity firm affiliate.
David Melcher, the chief executive of the Aerospace Industries Association, said earlier this month he anticipates continued "consolidation in industry as long as companies believe that investing in that company or capability can lead to further growth or that bringing together, for example, the capabilities of Northrop Grumman and Orbital ATK gives more investment or more leverage . . . than the company could do on its own."
Melcher previously headed Exelis, which was purchased by Harris in 2015.
"Every CEO does that calculus to figure out what makes the most impact, not only for the shareholders, but in terms of the company's capability," he told reporters following an AIA luncheon in Arlington, VA. "I suspect there will be more consolidation -- less if defense budgets continue to rise because then people can find a way, I think, to continue on their own, more so if defense budgets remain stagnant."
Loren Thompson, a defense industry consultant, agreed with Melcher.
"The timing . . . will depend entirely on demand trends from the Pentagon," he said of potential M&A activity. "In other words, if weapon spending goes up, then probably we won't see as much merger activity than if it is static."
Still, acquisition activity is well underway for some companies.
L3 Technologies, for its part, is bracing for a busy year. Chris Kubasik, tapped to become chief executive of the contractor at the start of 2018, said earlier this month the company has more than two-dozen companies under consideration as potential purchases.
He said L3 could make up to $1 billion in acquisitions each year. "The key is putting the pieces together to move up the food chain," he added.
Bob Kipps, managing director of the McLean, VA-based investment firm KippsDeSanto, said he expects a major transaction year in 2018.
"Valuations are probably at all-time levels -- certainly highs for the last 10 years -- and you also have a very robust credit market with still very low interest rates," he said.
Kipps also noted that private-equity firms are increasingly interested in the defense industry again.
"For the last year or two, private equity's been rotating into this vertical," he said.