Lockheed CEO Sees Acquisitions in 2009

WASHINGTON (Reuters) – Lockheed Martin Corp (LMT.N: Quote, Profile, Research, Stock Buzz) will look at assets for possible acquisitions in 2009, funded mostly by cash, even as the world’s largest aerospace and defense manufacturer remains “unconstrained” by the credit crisis, the company’s chief executive said on Tuesday.

Speaking at the Reuters Aerospace and Defense Summit in Washington, Robert Stevens said the company would like to grow in several areas such as healthcare, logistics and cyber security but is not looking at “very large” transactions.

“The best indication of what we are going to do is what we’ve been doing,” Stevens said. “Buying companies we understand that bring additional capabilities and core competencies to our business, that we can integrate without any disruption, and that add to the diversity of offerings we can provide a customer.”

Stevens also said Lockheed does not want to buy its suppliers, but added that he does expect some consolidation within the supplier base in 2009. Many analysts have also said the U.S. defense supplier base is too fragmented and that consolidation is likely in the coming months.

Speaking at the same summit, Deloitte LP’s vice chairman of its aerospace and defense group, Tom Captain, said several factors would drive consolidation next year, including European companies wanting to be a part of the U.S. procurement market.

U.S. defense spending — approved at more than $540 billion for 2009 excluding war costs — is not expected to decrease in the next few years even though the rate of growth is expected to slow. As such, European defense manufacturers looking to gain a presence in the U.S. defense market — the world’s largest — are expected to target U.S. suppliers.

Captain said consolidation would also be driven by companies wanting to diversify their portfolios and by private equity owners who might want to exit their purchases.

Some tier-two defense suppliers owned by private equity firms include Dallas-based Vought Aircraft Industries, which is 90-percent owned by Carlyle Group CYL.UL, and Primus International, which is owned by Oak Hill Capital Partners.

Lockheed’s Stevens also said falling valuations would drive more deals in the aerospace and defense sector. Valuations fell slightly this year as the credit crisis and the weak economy hammered stocks across every industry.

Deal valuations in the supplier sector range from 8 to 14 times EBITDA (earnings before interest, taxes, depreciation and amortization) depending on the company. Higher multiple companies usually have key proprietary technologies, are in high-growth areas or have access to key customers in the intelligence arena.

“Valuations will drive everyone to look at more deals … but it certainly isn’t the only thing people look at,” Stevens said. “But pricing and valuation matters. As we see multiples contract in the industry, we will see transactions that have more appeal.”

By Jui Chakravorty Das