The defence sector should continue consolidating -with more activity taking place among second- and third-tier defence contractors and diversified businesses -through equity-based mergers, debt-funded acquisitions and joint ventures, analysts at Moody's Investor Services believe. However, the strategy that companies pursue in buying other companies will have a significant impact on the success of those acquisitions. Consolidation based on equity transactions may produce operating synergies and keep financial risk relatively intact, said analysts at the credit-rating and financial risk-analysis company. Acquisitions financed through debt, however, tend to offset the benefits of the operating synergies - at least in the intermediate term. Indeed, debt-funded purchases could result in credit-rating downgrades, raising the cost of future financing for companies.
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