AeroVironment (AVAV -2.38%) stock slid nearly 2% Tuesday after announcing plans to make a $4.1 billion acquisition in the defense industry. The stock is recovering a bit from those losses Wednesday, though, as investors rethink their initial skepticism about the deal.
As of 12:55 p.m. ET, the stock is up 3%.
AeroVironment's big deal
AeroVironment stock outperformed the S&P 500 over the past year, rising 49% in price. The stock currently boasts a $5.5 billion market capitalization -- which sounds like a lot, but here's the thing: The company AeroVironment is buying costs nearly as much as AeroVironment itself.
AeroVironment will pay $4.1 billion in stock to acquire BlueHalo, a five-year-old, private-equity-owned defense company, which operates on the "cutting edge" of such whiz-bang tech as "Space Technologies, Counter-Uncrewed Aircraft Systems (cUAS), Directed Energy, Electronic Warfare, Cyber, Artificial Intelligence and ... Uncrewed Underwater Vehicles (UUVs)."
AeroVironment calls these technologies "complementary" to its own specialization in military drones, and predicts merging the two defense companies will "drive agile innovation and deliver comprehensive, next-generation solutions designed to redefine the future of defense."
Does this deal make sense?
Whether or not this is how things work out, investors rebelled yesterday at the price AeroVironment is paying, and are only just getting used to the idea today. But is $4.1 billion too much to pay for BlueHalo?
It depends on how you look at it. Although much younger than 53-year-old AV, BlueHalo is arguably a more successful company than its acquirer. BlueHalo anticipates booking more than $900 million in revenue this year, versus AeroVironment's trailing revenue of $754 million. Valuation-wise, AV will pay roughly 4.6 times 2024 sales for BlueHalo, which compares attractively to AV's valuation of 7.3x sales.
Viewed this way, AV seems to be getting a good deal. Of course, AV itself costs quite a lot for a defense contractor. The best I personally can say about the deal is that, while AV stock is too expensive, at least the price it's paying for BlueHalo is a little less extreme.
