The collapse of the proposed merger between BAE Systems Plc and EADS will shift the focus to smaller deals among global weapons makers as companies strive to keep revenue rising in the face of cuts in military spending by the United States and Europe.
Industry executives and bankers do not see other mega-deals on the horizon for now, after the $45 billion UK-French-German talks collapsed on Wednesday. The failure showed how easily a deal of that scale can be derailed by competing interests of different countries, despite commercial logic.
Instead, major defense companies likely will focus on possible combinations with smaller players such as Rockwell Collins, L-3 Communications Holdings Inc, SAIC Inc, ITT Exelis and Harris Corp, according to interviews with more than a dozen industry executives and bankers.
None of the big players in the global defense industry seem inclined to do mega-mergers similar to the BAE-EADS proposal, said Loren Thompson, a Washington-based defense consultant who has advised BAE's U.S. unit and its competitors.
The American companies are all at a place where they're not eager to grow in defense and are basically trying to secure their base, while the overseas companies have been chastened in watching the BAE-EADS transaction falter.
It is also unlikely that big U.S. prime defense contractors would bid for BAE Systems, even though the company is considered potentially in play after the failed merger, because of the potential complexity, these people said.
EADS said it would continue its aggressive hunt for takeover targets and alliances, especially with U.S. partners, though on a smaller scale than the BAE deal. EADS North America Chief Executive Sean O'Keefe said on Wednesday that EADS remained undeterred in its drive to increase its share of the U.S. defense market.
BAE's U.S. unit said it, too, would keep looking for possible mergers in the areas of cyber, intelligence, security, electronics and international businesses.
The scope of consolidation in the defense industry still hinges largely on how the U.S. Congress deals with $1.2 billion in mandatory budget cuts slated to start in 2013. Half of those cuts are for defense, and as long as those reductions threaten, mergers and acquisitions are expected to remain slow. Worldwide aerospace and defense deals have totaled $5 billion so far in 2012, compared with $27.5 billion in all of 2011, when United Technology's $16.5 billion takeover of