M&A experts say they expect an active start to 2019, but potentially a more 'tactical year'

December 31, 2018

By Marjorie Censer

After a busy 2018, industry experts say they expect continued mergers and acquisitions in 2019 -- but the pace may slow as the year goes on.

2018 brought the close of several big deals, including Northrop Grumman's purchase of Orbital ATK and General Dynamics' acquisition of CSRA. It also brought the announcement of several deals set to close next year, including Science Applications International Corp.'s acquisition of Engility as well as the merger of Harris and L3 Technologies.

Bob Kipps, managing director of the McLean, VA-based investment firm KippsDeSanto, told Inside Defense he's not expecting in 2019 "as massive a consolidation on the mega scale like we've seen in the last two years."

The companies that have already announced deals are busy integrating, meaning they're not able to take on much more, he noted.

"I think it's going to be a more tactical year," Kipps said.

He argued this could be the "last real solid year of M&A we're expecting in the cycle," given that the industry still needs to see a budget deal and then will be facing an election year.

Anita Antenucci of Houlihan Lokey told Inside Defense she expects the deal activity now under discussion to lead to a busy environment at least through the first half of the year.

But there are larger factors that could dampen the market.

"The market is pricing in there'll be another two-year [budget] deal," Kipps said. "Right now, that's the conventional wisdom. If that becomes less the conventional wisdom, that could slow deal activity down."

Antenucci agreed that uncertainty could "prompt everybody to put their pencils down." She also noted rockiness in the capital markets could decrease the activity of private-equity buyers.

Mark Frantz, general partner at Blue Delta Capital Partners, an investment firm focused on the government services market, told Inside Defense he is concerned about some of the larger economic challenges, such as the troubled Brexit deal and market upheaval.

"I'm really hard-pressed to see '19 as a great year," he said. "From a government contracting landscape, I think things will be almost as good as they were this year, but I don't think they're getting better and that obviously has an impact on M&A."

Some of the pending and recently completed deals, such as the Harris-L3 deal and the SAIC-Engility transaction, could lead to some pruning. Companies are sometimes forced to divest certain assets to complete the deal; other times, they realize certain businesses aren't a great fit.

Antenucci said she expects a handful of immediate divestitures, but said it typically takes longer for companies to weed out what they want to sell.

"I don't think it [will] be a one-time surge," she said. "It will be a renewal of the corporate divestitures that were very typical after the last big wave of consolidations in the '90s."