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Coronavirus Crisis Weighs Heavily on U.S. Aerospace Mergers

The COVID-19 pandemic has dragged the U.S. Aerospace stocks into an unprecedented crisis. The commercial business wing collapsed with air travel restrictions in place.

As far as the defense side of the Aerospace sector is concerned, halt in production of important military equipment at some of the facilities has been a growth inhibitor. Notably, Aerospace stocks have plunged 34.5% year to date (since the outbreak was first reported in China in late December 2019), compared with S&P 500’s decline of 11.4%.

COVID Impact on Mergers

During any economic crisis, capital available for merger deals usually dries up leading to termination of such deals.  That’s what happened at the time of the Great Recession, and the dotcom bubble burst before that. As far as the COVID-led crisis is concerned, the impact seems to be far more severe.

In a very short period of time, hundreds of thousands of businesses have shuttered or cut back their operations significantly, millions of workers have lost their jobs, consumer spending has been drastically reduced, supply chains have been disrupted, and demand for oil and other energy sources has plummeted. So, the one thing that all companies will like to hold on to is “cash”.

Per a report by Forbes, mergers and acquisitions (M&A) levels in the United States fell more than 50% in the first quarter of 2020 to $253 billion compared to 2019. Of the transactions that materialized, most were entered into or closed earlier in the quarter before the crisis spread worldwide.

State of the Aerospace Sector

In the recent past, we have witnessed a sharp spike in consolidations among stocks from the Aerospace sector. Rising competition has always been a major driver for such mergers, which enable the consolidated companies to operate an expanded product portfolio in a cost-effective manner.  Such consolidations by leading industry players are made on expectations of improved economies of scale for the consolidated enterprise.

However, the novel coronavirus outbreak seems to have struck a big blow to Aerospace stocks’ merger deals, with global M&A reaching a near standstill, by the end of March 2020. Jefferies International analyst Sandy Morris stated that as the impact of the crisis is now trickling down to Aerospace companies with limited liquidity, not all will survive.

Consequently, we witnessed decoupling of quite a few merger deals in the Aerospace sector, as effects of COVID-19 became more pronounced and companies realized that the desired synergies from the mergers will be difficult to achieve.

A Couple of Canceled Deals

On Apr 6, Hexcel Corporation HXL and Woodward WWD announced termination of their previously-announced $6.4-BILLION merger deal.  Both the companies decided to call off the mega-merger deal in response to the increasing impact of the coronavirus pandemic on the aerospace sector.

On Apr 25, Boeing BA announced the termination of its Master Transaction Agreement (MTA) with Embraer ERJ, thereby walking away from a joint venture that would have given it an 80% stake in Embraer’s commercial business. Boeing claimed that Embraer did not satisfy conditions under the agreement, without discussing the specifics, and hence terminated the deal.

However, Embraer held Boeing accountable for this wrongful termination of the deal and believes cash crunch on Boeing’s part to be the real reason behind such a step. Indeed, through the termination, Boeing can avoid paying $4.2 billion to Embraer. Many analysts believe coronavirus to have played a crucial role as the U.S. plane maker has already been under a lot of pressure for the 737 Max issues, which only intensified following lowerdemand and supply chain disruption caused by the pandemic.  

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The Boeing Company (BA): Free Stock Analysis Report
Embraer-Empresa Brasileira de Aeronautica (ERJ): Free Stock Analysis Report
Hexcel Corporation (HXL): Free Stock Analysis Report
Woodward, Inc. (WWD): Free Stock Analysis Report
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