Al Root
Shares of defense robotics company AeroVironment fell Tuesday after it announced an all-stock deal for defense technology start-up BlueHalo. Sometimes investor and management goals differ.
AeroVironment stock fell 1.5% while most defense stocks were rallying. Stocks of Lockheed Martin, Northrop Grumman, General Dynamics, and L3Harris Technologies were about 0.5% on average early Tuesday while the S&P 500 was up 0.1% and the Dow Jones Industrial Average was down 0.3%.
AeroVironment announced plans to acquire privately held BlueHalo in a transaction valued at about $4.1 billion. That's large for AeroVironment. Its current market value is about $5.6 billion.
"The acquisition of BlueHalo will create a diversified Defense Tech company with a highly complementary and differentiated portfolio of solutions in Uncrewed Systems, short and long-range Loitering Munitions, Counter Unmanned Aircraft Systems, Space Technologies, Electronic Warfare and Cyber, powered by AI and Autonomy," the company said in a news release.
Other defense stocks were rising after Russian President Vladimir Putin adjusted his country's nuclear weapons philosophy, essentially making nuclear war more likely by indicating Russia might respond with nuclear weapons to conventional attacks. The change came after Ukraine recently fired U.S.-made missiles into Russia.
Capital Alpha Partners managing director Byron Callan sees the rise of midsize defense contractors. He sees the rise of midsize defense contractors. "Mid-tier suppliers largely disappeared in the 1990s during sector consolidation. There was another wave of M&A in the mid-late 2010s as force protection companies that thrived during the Iraq and Afghanistan wars were bought up," added Callan. "The 2010s-2020s have seen a rise in new defense tech entrants, with capital provided by venture and private equity. BlueHalo is an example of that change."
Callan said the BlueHalo deal highlights the "further evolution of an emerging defense tech sector in the U.S. that will look different by 2030, compared to today."
AeroVironment's stock reaction shows investors might not be ready for the new midtier. They prefer small capitalization defense stocks to be relatively simple and easy to buy out down the road.
Through early trading, AeroVironment stock was still up more than 50% this year. Investors were focused on the company's momentum with its SwitchBlade "loitering munitions" system.
In August, the U.S. Army awarded a $990 million five-year contract for SwitchBlade, which is essentially a launchable, guided bomb that can stay in the air for a while as an operator finds a target.
The award was big for a company the size of AeroVironment. The contract works out to roughly $50 million a quarter, while Wall Street expects AeroVironment will report sales of about $182 million for the quarter that ended in October, according to FactSet.
AeroVironment management, of course, is thinking about the future. "BlueHalo not only brings key franchises and complementary capabilities, but also a wealth of technologies, diverse customers, and exceptional talent to AeroVironment," said CEO Wahid Nawabi in a news release. "Together, we will drive agile innovation and deliver comprehensive, next-generation solutions designed to redefine the future of defense."
Investors will have to adjust their expectations.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 19, 2024 12:14 ET (17:14 GMT)
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