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Unmmaned war is the new trend among prime contractors and Obama´s administration

Merger and acquisition activity in the defense industry is heating up, and is expected to far surpass the deal volume last year as larger companies target smaller ones with niche technologies.

U.S. Air Force MH-53 Pave Low's from the 20th Expeditionary Special Operation Squadron in-flight in Iraq during the last combat mission of the Pave Low on September 27, 2008. Credit: Reuters/Aaron Allmon/U.S. Air Force/Handout

The Obama administration’s decision to move funding from traditional weapons to areas of unmanned war is pushing prime contractors to buy smaller companies in that sector.

While merger discussions were rampant last year, poor visibility on stock prices, valuation gaps and tight credit kept most talks from ending in a deal.

This year, stable stock prices over many months has made executives more confident, leading to more agreement on valuations between buyers and sellers.

Valuations in the defense space now range from 7 to 9 times EBITDA, or earnings before interest, taxes, depreciation and amortization, but can be lower for some companies or higher for other businesses with highly specialized technology and strong potential for growth, many investment bankers said.

“Valuations have firmed up a bit; things were very depressed last year,” said Michael Richter, co-head of Aerospace and Defense at Lazard Ltd (LAZ.N). “We have seen many more deals so far this year than so far last year.”

Valuations ranged from 8 to 16 times EBITDA in 2007, but plunged in the next two years as the credit market collapsed.

“We are now 20 percent below the top, and I think we’ll be here for a while,” said William Alderman, founder and president of Alderman & Company Capital, LLC. “We are not going to go back to the high or the low for a while. Buyers and sellers feel that, and deals are getting done.”

Companies that offer intelligence, surveillance and reconnaissance, secured communication, optical imaging and infrared technology are in well-funded areas and are likely acquisition targets.

“I think the deals we are going to see have much less to do with buying factories that build weapons and much more to do with the old industrial base acquiring specialized people, know-how and modern warfare technologies to quickly move their offerings to where the Department of Defense will have procurement needs,” said Alderman.

Consolidation is unlikely in the top tier of defense companies, but…READ MORE HERE.