| NEW YORK
NEW YORK Feb 5 The U.S. Defense Department
remains skeptical of mergers involving its major contractors, a
Pentagon official said on Wednesday, amid industry expectations
that defense deal-making could revive this year.
Elana Broitman, whose office at the Defense Department
reviews deals that involve national security issues, told an
investor conference that "there are far fewer of the large
firms, so we're in a more constrained environment.
"Even though we're seeing a budget downturn which has
corresponded to consolidation in the past, we'd be less
comfortable now because of that smaller number," said Broitman,
the acting deputy assistant secretary of defense for
manufacturing and industrial base policy.
Defense M&A activity ground to a near halt in recent years
amid uncertainty about future U.S. military spending that has
kept sellers on edge and buyers more apt to invest in share
buybacks and dividend payouts than acquisitions.
The recent two-year budget agreement is expected to give
some clarity to executives and potentially pave the way for more
Most experts have been dubious of mergers among the biggest
defense contractors - including Lockheed Martin Corp,
Boeing Co, Raytheon Co and Northrop Grumman Corp
- although they believe the lack of a longer-term budget
deal could spark the desire for large-scale deal-making.
Top U.S. defense officials have repeatedly said they are not
looking for mergers among top-tier suppliers, but analysts have
wondered if deeper budget cuts under sequestration had changed
the Pentagon's view.
Broitman, whose comments came during a panel discussion at
Cowen & Co's Aerospace/Defense & Transportation Conference, said
the Pentagon would "review each transaction on its face."
"We're not really looking for more consolidation at the
prime level, but we will review others as a case-by-case
transaction," Broitman said.
Deals that might raise eyebrows include those that would
reduce the competition to one supplier, she said.
"There are areas...in the industrial base where we are down
to a single or two smaller-scale companies without which we
can't do a lot of our systems, and we're not comfortable going
offshore for those types of products," Broitman said.
Asked during the discussion about how the Pentagon would
view a private equity buyout, Broitman said, "It's just not
something we've focused on."
However, she later added that a buyout by an equity firm
that has foreign investors could prompt a more complex
Northrop Chief Executive Officer Wes Bush was asked about
taking the company private during the company's earnings call
last week, but said the company was more focused now on share
buybacks and dividend payments.
She also said that while spinoffs from large companies could
encourage more competition, "I don't foresee a lot of just pure
spinouts right now unless there are some tax reasons in some
cases that make it really attractive."