Operating below Wall Street's radar, Europe's biggest defense contractors have been buying up small U.S. aerospace companies in hopes of grabbing a piece of the Pentagon's record defense budget.
The deals have gained little attention because they've been relatively modest, typically valued at about $100 million apiece. But the European buying spree has netted 20 U.S. companies this year, many in Southern California, at a total transaction cost of nearly $2 billion, according to investment bank Houlihan Lokey Howard & Zukin. That's up from nine acquisitions last year and five in 2002.
"The U.S. defense market is the largest in the world," said Jon B. Kutler, chief executive of aerospace investment bank Jefferies Quarterdeck in Los Angeles. "Everybody is positioning themselves to get a bigger bite of that."
The draw is the Pentagon's $140-billion procurement and research budget. It accounts for more than half of worldwide spending on weapons, but most contracts are awarded to defense companies based in the U.S.
That has brought the Europeans to this side of the pond. So far, they've acquired mostly smallish companies because, analysts said, those are less likely to trigger a political backlash; a takeover of a large contractor that does major work for the Pentagon could alarm Congress, which is considering a bill that would restrict awarding military contracts to foreign firms.
Although the modest-sized aerospace firms may not generate significant income for their new European owners, they "are important because they allow the European companies to have a U.S. base to bid" for lucrative Pentagon contracts, Kutler said.
One recent deal that raised some eyebrows came when Europe's largest defense contractor, European Aeronautic Defense & Space Co. made its first U.S. acquisition, gaining Irvine-based Racal Instruments Inc. for $105 million in October.
Racal, a 40-year-old company, designs and makes devices to test a variety of electronic equipment, including cellular phones, jet engine components and radar gear used in military planes, helicopters, missiles and other weapons systems. The company employs about 320 workers at facilities in Irvine and San Antonio and is expected to generate about $84 million in sales this year.
The Racal deal was notable because EADS, a Dutch-based consortium, also owns 80% of Airbus, which in 2003 surpassed Chicago-based Boeing Co. as the world's largest commercial aircraft maker.
