Concentration in the arms industry: data on mergers and acquisitions

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This page provides a general background on arms industry concentration.

Since the mid-1990s, the arms industry has been characterized by increasing concentration through mergers and acquisitions (M&As). This trend has been most pronounced in the United States. In Western Europe the concentration process has been much slower because concentration on a national basis has reached its limits in most areas, while at the same time there is little European integration in the military sector.

Structural change

As a result of the merger and acquisition activity since the end of the cold war, there has been a clear change in the structure of the industry. This is shown in the first table below, which shows the changes in concentration of the Top 100 arms-producing companies in the period 1990–2005. At the end of the cold war the international arms industry was not very concentrated, with the top 5 companies accounting for 22 per cent of the total arms sales of the SIPRI Top 100. It is noticeable that the concentration in total sales was higher than in arms sales, with the top 5 companies accounting for 33 per cent of the total sales of the Top 100. By 2005 this had changed significantly, with the top 5 firms accounting for 43 per cent of total arms sales. This large increase in the share of the top companies is continued further down the list of companies, as shown for the top 10, 15 and 20. In all cases, the big change occurred between 1995 and 2000. Total sales in the period 1990–2005 were also more concentrated in a few companies but, since concentration of total sales was already high in 1990, the increase is not so great. The top 5 companies accounted for 33 per cent of the total sales of the top 100 in 1990 and 45 per cent in 2005. By 2005, concentration of total sales was very similar to that of arms sales. This may reflect increasing specialization on defence sales by the major players.

Changes in concentration ratios, SIPRI Top 100 companies, 1990 – 2005

Although by 2005 the five largest arms-producing firms accounted for 43 per cent of the total arms sales of the Top 100, this is still a very low degree of concentration compared to other high-technology markets. The market for major weapon systems would probably have become more highly concentrated, like those for civil airliners or pharmaceuticals, if national governments had not inhibited the growth of multinational firms to protect their defence industrial base. The international arms market has been dominated by US companies. BAE Systems is the only European company to have consistently been in the top 5 of the Top 100, having made a successful push for sales in the US market and gaining special status in bidding for US contracts. European companies are important, however, with Thales, EADS and Finmeccanica in the top 10. Nearly all arms-producing companies have shown a rise in arms sales between 1998 and 2005 and the top 20 companies have with few exceptions been relatively stable.

National distribution of the SIPRI Top 100 companies, 1990 and 2003

Looking at the changes in the regional distribution of the Top 100 arms-producing companies, the dominance of US-listed companies is consistent: they made up 60 per cent of arms sales in 1990 and 63 per cent in 2003. The share for European companies declined from 33 per cent to 29 per cent over the same period. Interestingly, the USA saw a decline in the number of firms in the Top 100 from 49 to 39, while for Europe the decline was only from 40 to 36, reflecting the very different nature of the industry and the restructuring experience in the USA and Europe.

The process of significant concentration in the arms industry since the end of the cold war evolved in phases. The most intensive period of concentration was between 1993 and 1998. The process has continued, but slowed down, since then. This is clearly illustrated by the table below, which shows the cumulative shares of the total sales of the Top 100 companies in 1988, 1993, 1998 and 2003. The curves for 1988 and 1993 almost overlap, showing almost no change in the size distribution, but there is a clear increase in concentration between 1993 and 1998, and a further, although smaller, increase between 1998 and 2003.

Size distribution of the SIPRI Top 100 companies, 1988-2003

Concentration of arms production in the USA

In the United States, there was an intensive period of concentration between 1993 and 1998, when a number of large-scale mergers and acquisitions took place. While this was made possible by changes in government policy, the financial sector also had a major role in this process. The catalyst of this development was a change in US defence industry policy in 1993 when the Deputy Secretary of Defense, William J. Perry, addressed a dinner attended by defence industry executives and openly encouraged consolidation—this became known as the ‘last supper’. The presence of financiers at this meeting illustrates the increasing role of financial capital in the arms industry. To promote the consolidation, the DOD allowed companies to write off restructuring costs against military contracts, with the expectation of large costs savings which never materialized. The policy ended when the DOD decided it had gone far enough and blocked the merger of Lockheed Martin with Northrop Grumman in early 1997. This left four major US contractors in 1998: Boeing, Lockheed Martin, Northrop Grumman and Raytheon—which are now four of the top five companies in the SIPRI Top 100 for 2004. The list below tracks the evolution of these companies between 1990 and 1998.

USA aerospace industry consolidation, 1990-1998.

After 1998 the rate of concentration among large US companies has slowed down and the M&A deals have become smaller, but there is still a significant amount of acquisitions activity in the US arms industry.

Major acquisitions in the North American arms industry 1998-2003.

Concentration reduced the number of 'prime contractors' - the end producers of major weapons systems - dramatically throughout the 1990s. For example, the number of suppliers of tactical missiles dropped from 13 to 3 between 1990 and 2000. The reduction of other types of weapon systems are shown in the table below:

Number of US DOD prime contractors in selected types of weapon systems, 1990 and 2000.

Concentration of arms production in Western Europe

In Europe the process of post-cold war adjustment was more complicated than in the USA, since restructuring necessarily involved cross-border mergers, which raised political issues. The major players in Europe also had quite different ownership structures than those in the USA. For example, in France, Italy, Portugal and Spain there was a high degree of state ownership of companies at the end of the cold war. This made the kind of financially driven merger boom that took place in the USA more difficult in Europe. Nonetheless, the driving forces in Europe were similar and led to an increase in concentration.

Since the late 1990s, there have been a number of major M&As in Europe. One result of this is the evolution of three major West European arms-producing companies: BAE Systems, EADS and Thales. The evolution of these three companies is shown in the three charts below.

The evolution of BAE Systems (former British Aerospace) 1977-2005

The evolution of EADS (former Aérospatiale Matra , DASA, CASA) 1985-2005

The evolution of Thales (former Thomson-CSF) 1987-2005

There were three waves of activity in the evolution of BAE System’s defence activities. First was the consolidation in 1977–87 of the British companies that made up British Aerospace. Then came the acquisitions of European defence interests and of Marconi’s defence business in the late 1990s. Finally, the focus moved to acquisitions of US companies. In this phase the change in name to BAE Systems reflected the company’s aim of internationalization and its intention to enter the US market.

The evolution of Thales reflects the different experience of the European industry, with continued government ownership and, until recently, opposition to cross-European consolidation. There was a short wave of acquisitions in the early 1990s, then a major wave of acquisitions across the world in the late 1990s. The company’s name was changed from Thomson CSF to Thales in 2000 following the acquisition of the British company Racal. With this acquisition, Thales became the second largest contractor to the British Ministry of Defence (after BAE Systems).

The change in European government attitudes is further reflected in the evolution of EADS (the European Aeronautics, Defence and Space Company, which was formed in 2000 from DASA (a subsidiary of Daimler) of Germany, Aérospatiale Matra of France and CASA of Spain. EADS developed its defence position through acquisitions in the early 2000s.

Consolidation among European companies continues and is likely to be reinforced by the increased political commitment in the European Union (EU) to harmonize rules for arms procurement and by the adoption of the 2005 Code of Conduct on Defence Procurement, which accepts competition in arms procurement among member states.

The concentration of the arms industry in the USA and Western Europe since the early 1990s has resulted in some very large companies, comparable in size to the national output of most developing countries and even exceeding many of them.

Mergers and acquisitions in the arms industry

There is still a significant degree of acquisition activity in the arms industry, within the United States, within Europe and across the Atlantic, although current acquisition deals are not as large as the mega-deals in the 1990s. The type of companies acquired is also changing. Arms industry acquisitions are clearly geared towards technologies in high demand and targeting companies that are well placed for major government contracts.

SIPRI has been tracking M&As as one way of assessing the degree and direction of concentration of the arms industry on a national and transnational scale. Available information on M&A activity is, however, often incomprehensive, sufficient only to help tracking ownership concentration within the arms industry but not to capture the complexity of the trend. Most importantly, the civil and military sides of companies involved in transactions are rarely accounted for separately, and listings of M&A activities tell us little about the degree of operational integration (that is, actual consolidation) within the merged company.

The following tables list major acquisitions in the arms industry:

Major acquisitions in the North American and European arms industry, 2006.

Major acquisitions in the North American and European arms industry, 2005.

Major acquisitions in the North American and European arms industry, 2004.

Major transatlantic and West European acquisitions in the arms industry, 2003.

Major transatlantic and West European acquisitions in the arms industry, 2002.

Major transatlantic and West European acquisitions in the arms industry, 2001.