What’s happening in the avionics industry? Just two months into 2007 and already $5.5 billion in acquisitions had been closed or announced. Aircraft components supplier TransDigm Group purchased Aviation Technologies for $430 million. Esterline Corp. bid $335 million to acquire Canada’s CMC Electronics from an investment fund. Biggest of all — and most intriguing — was GE’s agreement to buy Smiths Aerospace for $4.8 billion.
On one level, the transactions spoke to the consolidation that is taking place among suppliers to better cope with the costs and risks associated with big aircraft programs. To me, they also suggested that despite those challenges, the avionics business represents a value proposition that can entice a $160 billion leviathan like GE. If nothing else, there is movement in the industry. "It is one of the most interesting and dynamic markets we’ve seen in ages," Frost & Sullivan consultant Michel Merluzeau said during a recent AviationToday.com Webinar. "We’re seeing consolidation at the mid-to-upper tier, but we’re seeing new companies emerging — Garmin, Chelton Flight Systems, Avidyne — that have developed truly remarkable niche products and are moving up the ladder."
But what, really, is behind GE’s interest in Smiths Aerospace, coming six years after its larger gambit for Honeywell was blocked by European regulators? One can only imagine the discussions that take place in the thin air of Fairfield, Conn. It could simply be, as GE stated, that the two companies have complementary product offerings and similar customers — GE with its aircraft engines business and Smiths offering flight and mission management, modular processing, actuation and other systems.
GE Chairman and CEO Jeff Immelt described Smiths Aerospace as "a great extension of our aviation business." Already, an avionics portfolio is taking shape. Somewhat under the radar, GE Fanuc Embedded Solutions, a part of the GE joint venture with Fanuc Ltd., of Japan, has fortified its expertise in embedded computing by acquiring Condor Engineering, SBS Technologies and, as of last November, U.K.-based Radstone Technology.
Industry observers were inclined to see other motives in the GE bid for Smiths.
"This is either the beginning of something big, or I’m confused as to what they’re doing," said Paul Nisbet, an analyst with JSA Research in Newport, R.I. "If they were to go out now and buy somebody like Rockwell Collins, it would all start to make sense, I guess."
Nisbet didn’t see GE’s move as directly challenging American avionics companies. "There’s not an awful lot of overlap between Smiths and most of the true avionics companies in the U.S.," he said. "Smiths is much more diversified, which makes it all the more confusing as to what GE’s end game is."
Steve Shea, senior partner with STS Research Group in Wakefield, Mass., ventured that Smiths Aerospace is the means to another end for GE.
Simultaneous with the acquisition announcement in mid-January, GE and Smiths Group said they had agreed to form a joint venture, dominated by Smiths, in the airport screening and homeland security field known as Smiths GE Detection. "My bet is that GE was most interested in the detection side of Smiths, but they probably saw some domain relevance in Smiths Aerospace," Shea offered. "Smiths may have said, ‘if you buy both, it’s a deal, and we suggest you do aerospace first, for the value perception.’" He added, "Smiths Aerospace does have some outstanding products. No doubt some of their offerings are very relevant to GE."
My fascination lies in what GE brings to the table, and how that might influence the avionics industry. I have some experience with the company, having covered its plastics business for my hometown newspaper in Pittsfield, Mass. (That paper, The Berkshire Eagle, reported in January that the plastics division was for sale, signaling the end of a 104-year legacy in the city.)
Pittsfield is where Jack Welch, father of the modern GE, got his start. The GE executives I met were uniformly sharp, driven and firmly committed to the Six Sigma process of drumming defects out of the business. I was fond of saying, only half in jest, that GE is more a culture than a company. I expect it will inject a new degree of vitality into the avionics industry.