Captain said U.S. plans to reduce projected defense spending by $487 billion over the next decade were already beginning to affect arms makers, even as they sought to stave off an additional $492 billion in additional cuts that are due to take effect starting in January.
“We are at an inflection point,” Captain told Reuters. “We are at a new place going forward and ... it’s daunting in terms of the changes and the challenges.”
U.S. companies were taking steps to survive the downturn in defense spending, including moving aggressively into adjacent markets such as health care information technology, cutting costs and laying off workers, Captain said.
He said U.S. defense companies shed 44,000 jobs in 2010 and the number was expected to double this year, amid mounting budget pressures. If Congress was unable to avert the additional budget cuts, a total of 160,000 jobs could be lost over the next year or two, although expansion into adjacent markets and foreign sales could offset that trend somewhat, he said.
He said many big companies in the sector were also investing in development of new weapons such as micro unmanned vehicles and laser weapons to anticipate further military needs.
Merger and acquisition activity had stalled until the budget outlook was clearer, but would likely pick up once Congress and the Obama administration reached a deal on the additional budget cuts slated to take effect in January, he said.
He said Deloitte was advising companies on a number of M&A activities, including spinoffs, carve-outs and acquisitions, but he did not expect any of those deals to conclude until the budget outlook was clearer.
Captain said he ultimately expected BAE Systems (BAES.L) and EADS (EAD.PA) to complete their merger talks, since the combined company would be better balanced between commercial and defense activities.
“It makes sense,” he said, although he cautioned that the company’s complicated ownership structure could create some headswind for the combined group.