Neil Patel

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M&A in the space industry has always remained unaffected by global macroeconomic factors and downturns. On the contrary, unrest like the Russian-Ukraine war has triggered more economic activity in the aerospace and defense sectors.

The last few years have noted massive capital infusion into this sphere. In 2021 alone, both public and private investors directed $10B worth of funding. The geopolitical unrest spurred spending on worldwide military capabilities worth US$2.2 trillion in 2022.

This spending has sparked Europe’s highest rise in defense expenditure in the last three decades. Interestingly, the investment is more in innovation, thanks to the new and dynamic market sentiment throughout the space landscape.

Companies are now investing resources and engaging in R&D to develop Intellectual Property (IP) and Intangible Assets (IA). These products are in high demand from civilian and military customers who prefer to divert the risk.

For instance, the US Department of Defense’s Space Development Agency is searching for industrial sources to develop IP they need. Commercial agencies will likely meet their requirements for a large constellation of communications and missile-tracking satellites in Low Earth Orbit (LEO).

The significant infusion of capital has accelerated innovation, which has, in turn, led to heightened competition. More founders, industry disruptors, and startups are joining the fray, bringing in tech developments designed to capture a market presence.

The major players are identifying cutting-edge strategies to acquire and are deploying capital with the objective of delivering value. They are sustaining relationships with core customers by maintaining their leadership in advanced capabilities and business models.

M&A in the Space industry

Source: Seraphim Space Index Q2 2023

Check out this graph that clearly indicates the shift toward innovations and new startups. And that larger players are engaging in M&A in the space industry.

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The Ultimate Guide To Pitch Decks

Current Funding Trends in the Space Sector

Despite high interest rates, US investors continue supporting the space sector to capitalize on its robust growth potential. Experts estimate that the global space exploration market is likely to grow at a CAGR of 16.21% between 2022 and 2032. Let’s check out a few examples.

While the market was valued at $486B in 2022, by 2032, it will reach a valuation of $1879. Space propulsion technology has attracted investor interest, and Frontier Aerospace Corporation is a great example. Its products are in high demand from several commercial aerospace and defense firms.

This company has raised $10M from the private equity AE Industrial Partners and a Boeing-backed venture capital fund. AEI HorizonX is also an investor. VC investor Andreessen Horowitz and Shield Capital have funded LA-based satellite startup Apex, bringing the total funding amount to $27M.

Using these funds, the company intends to build Factory One, a large-scale factory that will produce Aries satellite buses. The satellite bus enables communication between ground stations and space satellites among its many applications.

Yet another top-tier company that has attracted capital is Axiom Space, raising $350M from Boryung Pharmaceutical and Aljazira Capital. Axiom is second only in terms of funding raised in the private space sector. To date, it has raised a total of $505M in capital.

Axiom is currently building its first commercial space station module and will likely launch it to the International Space Station. This launch is scheduled for sometime in 2026.

The top-tier SpaceX or Space Exploration Technologies, owned by Elon Musk, has raised the highest funding in the sector. US venture capital firm Andreessen Horowitz has valued the company at $137 billion. SpaceX partners with NASA and operates the largest commercial satellite constellation across the world, providing satellite internet service.

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Impact on M&A in the Space Sector

The above examples clearly indicate the monumental capital driving innovation in the space sector. Experts are noticing a trickle-down effect, with smaller startups also engaging in M&A activity. This sector is displaying maturity with strategic alliances designed to accelerate growth.

Acquisitions are no longer restricted to legacy corporations with significant resources to purchase startups. Private equity firms and institutional investors are also completing large transactions. For instance, in the $6.4B deal, Advent acquired Maxar Technologies, which builds satellites.

More private equity investors entering the market indicate that the space segment has several small startups going for low prices. Once these companies raise their revenues, they come up for sale at higher prices. As a result, we will likely see many more M&A deals in the coming years.

Why Larger Companies Are Looking at Viable M&A Deals

Digital innovations, the global pandemic, and geopolitical conditions will continue to open up new opportunities for potential dealmakers. However, M&A in the space industry is not above risks. Acquirers need to move cautiously and quickly when snapping up viable projects.

Federal authorities worldwide are likely to develop robust policies to secure domestic manufacturers. Particularly in the aerospace and defense segments. Governments may also encourage cross-border industrial partnerships that trigger innovation.

However, they may be wary of hostile takeovers intended to cripple the sector. As long as dealmakers can create the optimum balance. M&A activity could potentially ramp up in the coming years. The focus is also on taking advantage of the evolving business landscape conducive to growth.

Some of the key factors include the demand for military equipment and defense capabilities, a laxer regulatory environment, and technological advancements. Bigger defense budgets and the reliance on the industrial sector to develop viable defense solutions are also triggers.

Changing priorities and mission statements and companies adapting to the long-term effects of remote working are also influencing M&As.

Contracts and M&A with the US Government Are Subject to Extensive Due Diligence

Companies entering into M&A deals and contracts with the adjacent civilian government services industry must comply with extensive regulations. These rules and criteria are more stringent than those of M&A with other organizations.

Any lapses can attract serious penalties, civil fraud damages, termination of the contract for default, and suspension. Companies also stand to attract post-M&A legal enforcement and litigation for failing to meet the statutory and regulatory criteria.

The Federal Acquisition Regulation (FAR) (Title 48 of the Code of Federal Regulations) suspension and debarment process (FAR subpart 9.4) outlines the consequences of defaulting or over-charging a governmental authority.

Even before they are awarded, contracts with government agencies now undergo meticulous due diligence. This factor makes deals much more complex than in previous years since the primary requirement is complete transparency and predictability with revenues.

Regardless of the stage your company is in, you should know how to navigate the due diligence process. Check out this video, where I have explained in detail how it’s done.

Contractors Entering Into M&A Deals Must Comply with Regulations

M&A in the space industry is often driven by contracts to provide services to the government. Buyers may have less robust compliance programs, which may not be a concern when they work on other commercial projects. However, this risk profile may not be suitable when they work on federal tasks.

When entering into M&A transactions, acquirers must ensure the merger agreement includes the relevant regulatory compliance. For instance, pre-closing regulatory approval requirements and post-closing integration.

The agreement must include government notices, and dealmakers must work out the protocols and timeline for obtaining government approvals. When entering the M&A, it is advisable to bring in legal teams trained in regulation-compliant transaction documents.

The experts will make sure to include representations, warranties, covenants, and indemnification provisions that help mitigate the most significant risks. These clauses will cover compliance with the related aspects of government contracts.

Some examples include cybersecurity concerns, pricing structure, technical aspects, and ESG. The agreement will also have conditions that the target company has maintained sufficient records for examination by the buyer’s accountants.

Most importantly, the company should never have attracted adverse audits or been involved in claims or government investigations. Organizational conflicts of interest are another concern when applying for government contracts.

Dealmakers must ensure that the surviving company can provide impartial and dedicated assistance to the government. There can be no conflict of interest if the buying or selling company provides services or products to commercial customers.

Key Concerns When Entering into M&A in the Space Industry

Dealmakers considering transactions in the aerospace and defense sectors must exercise extensive due diligence when concluding the mergers.

Reviewing Existing Contracts and Proposals

For starters, dealmakers should get clean teams to review the existing contracts and outstanding bids or proposals for both companies. In case of any antitrust issues or conflict of interest, the M&A deal can include partial divestiture. Or sell off some of the target’s investments, assets, or contracts to take away this risk.

Dealmakers must scrutinize any proposals for contracts they may have submitted to federal agencies. The M&A deal could potentially result in material changes in the proposal. The agency may have to reevaluate the proposal against the changes in the applicant’s structure.

Companies that work in the same industry might have entered into similar contracts to provide products and services. Post the M&A deal, they may have to abandon duplicated contracts. If the deal was for Indefinite Delivery, Indefinite Quantity (IDIQ), the M&A could raise the risk of losses.

The surviving company could face several challenges with the transition, where it must continue to honor its commitments. Working out the pricing structure and including indirect taxes and other dues can pose additional organizational issues.

Before finalizing the transaction, dealmakers should examine the merger’s effects on the contract. They may also want to inform the agency and check for the contract’s future performance. Checking the contract’s clauses for any provisions regarding possible M&A deals is also advisable.

Using Post-Closing Transition Assistance

When acquirers are under government contracts, they must cautiously use post-closing transition services from the seller. To ensure that there is no conflict of interest, the seller should organize a separate facility for the transition period.

All activities related to the integration and closing can be done in this location to prevent potential security risks and conflicts of interest.

M&A Payment Terms

M&A transactions often involve payment terms where the buyer offers earn-outs, stocks, warrants, and/or cash. These terms enable the seller to maintain a financial interest in the business even after the closing.

Per the terms of their employment contract, the seller may transfer some of the stock to the company workforce. This ownership share could raise the risk for the government contract.

Keep in mind that in acquisitions, mergers, or fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

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Reworking Existing Pricing Structure

Contractor companies engaging in M&A transactions may have to rework their pricing after the deal’s closing. That’s because they must factor in the several additional expenses arising from the M&A procedure.

For instance, indirect rates, final overhead costs, environmental clean-up costs, long-term incentive compensation plans, and Cost Accounting Standards (CAS) noncompliances.

Getting Government Approval or a Novation Agreement Is Mandatory

M&A in the space industry and the defense and aerospace sectors must get government approval. This approval is mandatory if the participating companies provide products and services to federal agencies.

As a rule, the Anti-Assignment Act prohibits companies from transfering or assigning federal contracts to a third party. However, the agency might use its discretion to permit the legacy company to take over the contract. This approval is called the “novation agreement.”

Although there may be some delays in getting approvals, in most cases, getting the go-ahead is easily done. A novation agreement is typically essential if the contract transfers to the acquirer as part of the asset sale.

If the federal contract is subject to the novation agreement, the buyer can include getting approvals in the merger agreement. They can include a combination of covenants and indemnity provisions where the seller commits to getting the novation after closing.

Alternatively, the seller can commit to indemnifying the seller for the costs of getting approval.

In Conclusion

M&A in the space industry is undergoing significant transformations thanks to the massive influx of investment. The aerospace and defense industry is booming, with more federal agencies relying on the commercial sector for innovation and products.

Not just the major players but small startups and mid-range firms are entering the sector with disruptive concepts. They are also entering into M&A deals to build a market presence and an edge over the competition.

Several factors contribute to this phenomenal growth, and geopolitical unrest is only one. Experts anticipate much more to come in the next few years as technological advancements ramp up interest from investors.

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Neil Patel

I hope you enjoy reading this blog post.

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