Defense Is Going Great Guns

There's an M&A boomlet as companies scramble for scale

On May 16, the Carlyle Group, a leading private equity firm, announced plans to buy a majority stake in Booz Allen Hamilton's U.S. government consulting business—much of it involving military and security work—for $2.54 billion. It's further confirmation that defense dealmaking is picking up. About $8billion worth of industry deals have been announced in recent weeks. On May 20, European Aeronautics Defence & Space CEO Louis Gallois said the Franco-German group, which already has done U.S. deals, is shopping for more. And why not? The weaker dollar makes U.S. defense companies tantalizingly cheap to European rivals.

Powering the boomlet is the prospect of lower defense spending, especially if a Democrat wins the White House. In a shrinking sector, scale rules. U.S. defense-related spending, which could peak at almost $690 billion this year, may shrink to as little as $550 billion over the next five years, should engagement in Iraq wind down. Latest market chatter: Harris Corp. (HRS) may be up for sale. A spokesman for the Melbourne (Fla.) defense electronics maker declined to comment.

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