In the 25 June 2007 issue of the PCE Aerospace & Defense Newsletter, we presented a bullish 12-18 month outlook on the modeling, simulation & training (MS&T) sector, and per our predictions, deal activity and prices obtained by sellers have remained high. MS&T owners have continued to receive a median 1.8x sales price when selling their companies.
Limits to Continued High Pricing
Throughout 2008, owners of MS&T companies for sale will continue to benefit from strong pricing as buyers continue to appreciate the superior economics of simulators and simulation solutions in anticipation of tighter commercial aviation and government defense budgets; however, three dynamics will dampen prices beyond 2008 (regardless of who occupies the White House).
1.Demand for selling MS&T companies will soften as potential buyers cherry-pick assets of greatest appeal. For example, once an MS&T company vertically integrates by acquiring an image generation (IG) company, it will probably not buy another IG company for a very long time.
2.Except within narrow niches, lack of economies of scale in the MS&T sector will limit the potential for on-going consolidation plays. The sector is characterized by limited batch production runs versus continuous production. Although the Air Force might require thousands of fighter aircraft, it will never require a thousand full flight simulators.
3.Despite the relative degree of immunity of MS&T to budget cuts, it is not fully immune. Deal prices will soften as concerns about underlying program cancellations increase. While a 20% platform program funding cut may not translate into a 20% cut in the number of associated simulators, should the Department of Defense cancel a program, it certainly will not need the simulators; indeed, pricing can cliff for MS&T companies that are highly exposed or overly concentrated within programs at risk of cancellation.
Attractive Segments and Technologies
Strategic buyers will continue to pay above-market prices for companies that provide access to key customer segments or fill gaps in important critical or emerging technologies.
Even if the Army’s level of ongoing combat operations in Southwest Asia decreases, the world will remain a dangerous place. MS&T companies with channels to the SOCOM and AFSOC communities will remain attractive to buyers, as will companies with domain expertise in these areas:
- Counter-IED training and crew protection devices
- Dismounted immersive soldier virtual training
- Live environment training that better replicates operational environments
- Technologies that train small-unit leaders in cognitive & conceptual skills
- More accurate geo-location / SA capabilities for live training
- Terrain changes & correlation on-the-fly (for L-V-C integration)
- Ability to train / test across one network infrastructure
- Automation techniques for constructive simulation
- Common radar sensor models
PCE Investment Bankers will be at I/ITSEC 2007.