KAL Capital A&D 2019 in Review

Dear Friends,

Happy New Year! KAL Capital Markets finished the year with six closed transactions; each of the businesses were well received by an aggressive set of strategic and financial buyers. We are set to embark on our fourth year, and we are proud to say that both our transaction activity and number of team members have continued to grow each year.

The year has gotten off to a wild start with headlines for the defense sector (Iran) and commercial aerospace (B737MAX halt) competing for top bill. In the near-term the MAX news has had a broader effect on the supply-chain as Q4 news went from bad to worse as the supply-chain is now grappling with a full halt of MAX production. The whipsaw of going from rate-readiness checks for 60 plus airplanes to a full-halt within a twelve-month period has very few parallels.

From an M&A perspective, we expect the near-term reverberations to be profound as B737MAX content will be heavily discounted and likely create a meaningful gap in expectations between buyers and sellers. The open question will be how long following return to service this gap will remain; we are optimistic but unfortunately believe that the primary source of 2020 M&A activity for the MAX supply-chain will be distressed in nature. That said, we strongly believe that the MAX problems will be not only isolated but have a positive effect on M&A activity for businesses either with limited MAX content or outside of the commercial OEM space entirely. We have already seen private equity and strategic buyers looking to deploy capital aggressively in the defense and aftermarket sectors as well as to balance MAX heavy investments with other growing platforms (F-35, B777x, etc).

Getting down to it, we believe 2020 will be the most active year for M&A over the past decade. This prediction is driven by a combination of factors including a continuation of extremely seller friendly valuations and the upcoming presidential elections. Election years tend to be busy as business owners look to transact ahead of any major policy (especially defense spending) changes, but we expect activity to be amplified by the proposed tax changes being suggested by essentially all Democratic presidential candidates. While progressive ideas such as wealth taxes have garnered most headlines, several of the more centrist candidates are proposing material increases in the tax treatment of capital gains. Rightfully so, capital gains tax treatment is critical when considering a M&A event, and we saw a smaller version of this in 2012 as sellers rushed to transact ahead of the Obama Administration’s more minor increases in tax rate.

Sincerely,

KAL Capital Markets Team

Please see the KAL Capital AD Q4 2019 Newsletter