ACP Market Analysis: Emphasis on Electronic Warfare Drives C4ISR M&A Activity

Electronic Warfare (EW), the battle for controlling electromagnetic spectrums, relies on data and signals to survey, fight, and defend military and civilian assets in complex missions. Electronic warfare capabilities provide a wide array of benefits, including jamming and spoofing, in conflicts on land, sea, air, and space in both offensive and defensive capacities.

In March 2019, General Paul Nakasone, the head of U.S. Cyber Command, told Congress that combatant commanders are employing non-kinetic capabilities such as cyber, electronic warfare, and information operations to:

Improve force protection, bolster intelligence, understand and shape the information environment, and disrupt the operations, command and control, and propaganda of several insurgent and terrorist groups.

As adversaries build sophisticated EW capabilities, the Department of Defense (DoD) is working to out-innovate opponents in the electronic battlefield. In June 2019, the U.S. Army announced the development of the Electronic Warfare Planning and Management Tool (EWPMT) with the help of Raytheon (NYSE: RTN). The EWPMT will allow the Army to visualize, manage, and control EW assets by integrating electronic warfare capabilities with existing targeting and surveillance infrastructure. The EW planning tool uses open architecture, which will allow EWPMT to be used across other military services and multi-domain operations.

With the future of warfare rapidly changing, the DoD is expected to invest approximately $30 billion in electronic warfare capabilities over the next three years. According to Congressional Research Services, the DoD is seeking $10.2 billion for electronic warfare Research, Development, Test, And Evaluation (RDT&E) in GFY2020, a 9.7% increase over the prior year. Additionally, Congress recognizes the importance of enhanced EW capabilities and provided $700 million of funding in excess of the requested budget during GFY2020 budget appropriations.

While traditional service providers historically avoided Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance (C4ISR) product businesses, the market has shifted as many service providers now find products synergistic with existing services. Strategic and private equity buyers are using M&A as a vehicle to quickly acquire leading proprietary solutions and human capital in the EW market. EW provides traditional service providers access to a high-growth and high-margin market.

Targets with capabilities in agile radio frequency technology, sensors, and signals intelligence are in high demand from a growing set of buyers, increasing the cadence of C4ISR M&A. The number of C4ISR service deals per quarter has increased from nine deals in 1H19 to 14 deals in 2H19 . Additionally, the number of C4ISR product deals has doubled from four deals in 1H19 to eight deals in 2H19. Notable deals in the C4ISR market in the last 12-months include the following:

• CACI’s acquisition of Mastedon
• Mercury System’s acquisition of Syntonic Microwave
• Accenture’s acquisition of BTC Solutions
• Parson’s Acquisition of QRC
• QinetiQ’s acquisition of MTEQ

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