European aerospace group EADS is exploring tie-ups, acquisitions and even large scale alliances or mergers in a bid to reach its long-standing goal of quintupling revenues in the United States, the world's biggest arms market.
Efforts by the Airbus parent to secure a significant US acquisition have run into roadblocks in the past, which makes many bankers doubt that the Franco-German-Spanish group is finally ready to dig deep into a USD$15 billion cash pile.
But analysts say the outlook has never been brighter given favorable exchange rates, the pending ascent of an ambitious, new chief executive in Europe, strong growth in the commercial airline market, and US market valuations that have declined to more reasonable levels amid cuts in US military spending.
Sean O'Keefe, chief executive of EADS' North American unit, says the company is integrating four mid-sized acquisitions that were already completed over the past year, but is still actively looking for others in the company's major business areas, particularly in the services and satellite sectors.
The company is pushing organic growth, but clearly needs acquisitions to jump-start its drive to jack up US revenue, excluding Airbus, to USD$10 billion a year from USD$1.8 billion now. EADS is reporting 2011 earnings on Thursday.
At the same time, O'Keefe said in an interview last week, EADS is in talks with what he called an "amazing number" of US firms that want to tap the European company's global expertise as they look to grow their own foreign sales.
"We are constantly in pursuit of partnering agreements across the full spectrum," he said, citing interest from a range of US companies "who are looking to maintain some grip on the marketplace or at least stop a free-fall."
O'Keefe declined to be more specific, but said the company had earned respect for its work on a light utility helicopter for the US Army that Pentagon leaders frequently single out as a model program for staying on budget and meeting its schedule.
Asked if EADS would rule out a significant transatlantic tie-up to meet its revenue target, he said, "As it stands right now, we're looking at the full range" of options. He said EADS was open to a range of possibilities, including a merger.
EADS, formed by a 2000 merger to parry US consolidation, stopped just short of a US acquisition valued at around USD$1 billion in 2008. It was keen to hold cash as the global economy plunged into crisis and EADS dealt with costly aircraft delays.
Several people familiar with the matter said at the time that the deal was with Comtech Telecommunications, which makes military hardware. The companies never confirmed any discussions.
The reason for EADS' more recent change of tempo lies in a combination of tricky internal balance and market pressures.
Chief executive Louis Gallois launched a drive in 2008 to make EADS less dependent on cyclical revenue from Airbus, the commercial airliner part of the business which made up 64 percent of EADS sales in 2010. His Vision 2020 would balance Airbus and non-Airbus sales by the start of next decade.
But the discrepancy is so great that military, space and other activities would have to grow at rates well above levels deemed realistic in a recession to offset even meagre growth at Airbus. And for now, civil jet sales are anything but sluggish.
For example, if Airbus revenues grew at a compound annual rate of just one percent in 2010-2020, the rest of EADS would have to gallop along at almost 8 percent.
It is a luxury problem due to success in civil markets, according to Gallois, but one that is forcing a rethink as he prepares to hand over a richer and more stable company in June than the internally focused one he took over in 2007.
Insiders say EADS is recognizing it must act more boldly to balance its portfolio or resign itself to being 'Airbus-Plus'.
GROWING OUT OF EUROPE
Gallois' designated successor, Airbus CEO Tom Enders, a German citizen, is an energetic industry leader with a predisposition to favor transatlantic links, according to people who have watched his rise in the European company.
He will come into the job knowing that EADS is on a stronger footing with its once troubled A400M airlifter and the A380 airliner projects, both of which had caused it to hoard cash.
Enders is expected to set his sights on growth in the US and India, as well the commercial arena in China.
"There will be a big effort to be more international in future; EADS knows the future is not in Europe alone if the company is to be competitive," said a source familiar with the company who asked not to be identified.
Asked if a merger or alliance with a US prime contractor could realistically be considered, the source said, "There will certainly be discussion about that."
EADS declined comment.
Such a move would have to get round reservations about the French government's 15 percent shareholding and 7.5 percent soon to be acquired by Germany under a reorganization of EADS' complex structure, but Enders' is seen as a relatively known quantity in the US due to friendly relations with Northrop.
Meanwhile valuations are coming down in the US defense market, which should stimulate greater activity across the sector, bankers say.
O'Keefe, who survived a plane crash in 2010 that killed former Senator Ted Stevens, says acquisitions are getting more attention now that the company is no longer focused on its bid to unseat Boeing as maker of US refueling planes.
EADS had teamed up with Northrop Grumman in 2005 to successfully bid for a USD$35 billion US refueling plane deal, only to see the contract cancelled by government auditors.
Northrop subsequently pulled out of the alliance in March 2010, leaving EADS to bid on its own, a competition it lost to rival Boeing in February 2011.
EADS nearly partnered with L-3 Communications to put together a second tanker bid, but L-3 pulled out after coming under pressure from US lawmakers, who were critical of alleged European subsidies to Airbus.
The tanker bid would have seen EADS assemble converted Airbus jets in Alabama, creating the germ for what could be a bigger Airbus civil presence in the US under Enders as EADS seeks to increase its exposure to the currency in which planes are sold.
O'Keefe said bidding solo for the tanker contract gave EADS "a much deeper understanding of capacity and capability in the entire corporation... which makes the opportunities for acquisitions that much more likely or possible."
He said the company's experience in tough civil markets gives it an advantage now that Washington is stepping up competition and buying more commercial, off-the-shelf type defense kit.
"We know how to be competitive, we know how to execute on contracts," he said at the Columbus, Mississippi plant where EADS employs 350 people to build commercial helicopters and the Army's UH-72A Lakota helicopter.
"A lot of our competitors in the industry don't. They're still lamenting the demise of cost-plus contracts; they're still lamenting the demise of sole-source arrangements. We've got a mindset of operating in that space every day."