A bid battle between BAE, Boeing and Raytheon looms for Argon ST

May 12, 2010

As the U.S. prepares a massive attack against the Taleban in Afghanistan, where intelligence gathering – although sometimes imperfect – is key to success (as well as “hearts and minds”), it has emerged that some of the world’s biggest defense companies – notably BAE Systems, Boeing and Raytheon – are targeting for acquisition Argon ST.

Having hired in January Stone Key Partners, according to Reuters, Argon is seeking US$30 per share for its business, valuing it at US$660m. That’s a 40 percent premium to where its share price was on January 8 – just before news of a possible deal broke – but only 20 percent higher than where the share price is was as of May 11.

The question is why would Argon want to sell itself? There is one clue. Its growth rate has slowed in recent years. Its top line used to be growing at 11.9 percent per year. Now it is at 6.5 percent. Being part of a bigger defense group would help solve that problem.

A slowdown in growth may on the surface seem strange when Argon caters to what the defense experts call the C5ISAR space (otherwise known as Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance and Reconnaissance). That is a growing niche area focused on creating military grade virtual 3D, 360 panoramic battlefield views. Argon designs and develops sensors, electronic countermeasures and electronic attack systems, geo-location systems, plus reconnaissance equipment, to plug into this virtual 3D space.

But, budgets are under strain – and where governments can cut back, they will. “Curtailment of expenditures by the US government and its allies for defense equipment and supplies could have a negative effect on Argon’s ability to grow revenue and earnings,” says U.S. broker Stifel Nicolaus in a research note.

Significantly, the three founders of Argon – chief executive Terry Collins, Victor Sellier and Thomas Murdock – still own 34.5 percent of Argon’s stock, and probably just want to take money off the table. Indeed, the company’s share price is pretty much back to where it was three years ago – at just under US$25 per share – before the onslaught of the global financial crisis.

For Raytheon, BAE Systems, and Boeing, Argon would fit snugly into one of their portfolios. As recently as May 3, the US Navy picked BAE to develop its primary intelligence, surveillance, reconnaissance and target system (ISR&T). Incidentally, Argon ST just happens to be one of BAE’s partners on this US$72m contract.

Nevertheless, skepticism of a deal actually happening remains. “While we have no knowledge of any M&A activity or discussion, we feel confident that there are multiple potential buyers for the company,” says Stifel Nicolaus. “Whether or not such bids, if real, were high enough to secure a deal are another story.”

On May 13, Argon will report its second quarter results. Hopefully, it will update the market on the continued M&A speculation surrounding the company.

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