Merger Slowdown Looms for Entrepreneurial Space Firms

by

WASHINGTON –
 While the wave of
 
aerospace and defense acquisitions during 
the past decade has
 created numerous opportunities for owners of small and midsized companies to cash in, analysts predict things will slow down 
in the coming years.

The current economic climate and investor caution pose a challenge for entrepreneurial companies trying to sell or attract investors, a panel of analysts said May 28 at the Space Investment Summit here
.

“Between what’s going on in the subprime market, auction rate securities, the real estate industry and 42 other things, you have a global liquidity crisis that we’re dealing with right now,” said John Higginbotham, founder of the Reston, Va., investment firm Redshift Capital, formerly called
 SpaceVest Capital
. “There are serious, serious issues going on over the next [few] quarters.”

Putting stock out for public purchase, such as the anticipated Initial Public Offering (IPO) by remote sensing imagery provider DigitalGlobe of Longmont, Colo., is a relatively inexpensive way for companies to get more money
 to expand their business, Higginbotham said.

“Despite what you hear about the economy, IPOs are getting done,”
said Hoyt Davidson, chief executive and partner at the
 investment firm Near Earth LLC of New York.

Aerospace stocks on average 
either have outperformed or kept pace with other industries in a market that has seen investors withdraw $45 billion this year, 
Davidson said. The commercial space sector has underperformed in the stock market, but has higher per-share earnings than other space and defense sectors, he added
.

Mergers and acquisitions have doubled in less than a decade to 350 per year over the past three years, due in large part to companies seeking to expand their business from provider of niche components or subsystems to full system supplier, said Anita Antenucci, managing director of investment firm Houlihan Lokey in Washington.

“There is a level of integration going on – driven by the uncertainty of the long-term market that they have been most focused on over the last several years, namely, during wartime,” Antenucci said. “This is a challenging financial market and investors are looking more carefully. They’re not able to buy simply on vision and a year’s worth of growth.”

The satellite communications market must consolidate for growth to occur, but geographic information systems – remote sensing and related 
software and integration services – is a developing market that is about to explode, Higginbotham said. “It’s one of the most exciting sectors going forward because we haven’t invented it yet. We’re in the process of that right now,” he said. “Even larger companies are starting to look at services and technologies that can start to open up a whole new model.”

Davidson said satellite video, direct-to-home television, satellite broadband and small satellites, payloads and equipment are active markets. A few talented engineers easily can 
start up a company in those markets and reach up to $20 million in revenue before hitting a profit ceiling and opting to sell, he said.

Potential buyers look for signs that a company is viable in the current market, which has shown a higher demand for providers of
 services than components
, Antenucci said.
 Companies 
that have leaned too heavily on government set-aside programs
 are 
struggling to get the valuations that attract buyers, she added
.

Business classification also affects a company’s perceived earnings potential
, Higgenbotham said, describing how satellite operators want to be considered media
 rather than aerospace or defense firms
. “They know deep down that they get their revenue in aerospace and they know their entire business is dependent on satellite operations. But believe me, they spend 24/7 and 99.9 percent of their [marketing and communications] budgets positioning themselves as a converged media company,” he said.

In the future, small companies will turn to rollups, or mergers, with other companies to stay competitive, while larger companies will continue to acquire smaller ones
 that can produce innovation difficult to achieve within a
larger corporate
 structure, Higginbotham said.

Antenucci predicted larger companies will continue with acquisitions, but at a slower pace. “I think you will see fewer deals. …
Buyers are more willing to be patient in finding the right thing, despite the fact that they have a lot of cash to put to work.”

Comments: riannotta@space.com