U.S. siren call irresistible for Europe arms makers
ROME (Reuters) - European defense companies will step up their frantic search for a slice of the U.S. defense market -- even if a new U.S. administration, spending cuts and a recession make an already difficult mission harder still.
The United States accounts for about half the world's defense spending and has long attracted -- and frustrated -- European firms like Franco-German EADS (EAD.PA) and Italy's Finmeccanica (SIFI.MI) which are eager for a foothold to spur their global ambitions.
But the dominance of U.S. rivals has hampered them, a problem which analysts say will be made worse by a more dove-ish new U.S. administration, planned cuts to big-ticket programs and a rise in protectionist tendencies amid a global recession.
"It has never been easy for European companies to break in to the U.S. market and it just got a whole lot harder," said Doug McVitie of Arran Aerospace consultancy. "The defense budget is not expanding like the (former U.S. President Ronald) Reagan Star Wars years and they won't allow foreigners waltzing in."
Analysts say that Europeans facing flat or lower defense spending at home are unlikely to be deterred, making more joint ventures or acquisitions like Finmeccanica's $4 billion purchase of U.S. firm DRS Technologies last year inevitable.
European-led acquisitions accounted for 37 percent of U.S. defense sector deals and more than 73 percent by value in 2008, as a weak dollar provided a powerful incentive, according to a study by Jane's Industry Quarterly.
"If your domestic market is shrinking but your shareholders still expect growth, that means looking at the United States -- which is like a siren call for the defense industry," said Guy Anderson, lead analyst at Jane's Information Group.
"And to do business in America, you've got to be in America. You've got to have a footprint. Acquisitions are going from nice to have to a necessity."
The U.S. defense budget for fiscal 2009 is set at $515 billion, excluding further outlays for war in Iraq and Afghanistan.
Even if spending stays flat, the intelligence, surveillance and reconnaissance segment promises exponential growth, and overlaps with the homeland security budget, said Anderson.
DIPPING ITS TOES
Britain's BAE Systems (BAES.L) -- Europe's largest defense contractor that generates over half its sales from the U.S. -- could continue scouting for more deals as could Finmeccanica, on a much smaller scale than the DRS buy, said Anderson.
Finmeccanica has stuck to its U.S. growth ambitions despite being penalized by investors for paying a 27 percent share premium to buy DRS and then facing cuts to the U.S. presidential helicopter and C-27J cargo plane programs it is involved in.
Smaller British peer VT Group (VTG.L) has already said it is planning an acquisition spree in the fall and will bid for $3 billion worth of U.S. contracts.
But analysts say the European company most likely to strike the next big U.S. deal is France's Thales SA (TCFP.PA), which was eyeing DRS before Finmeccanica snapped it up. Continued...
