"There's lots of churn, but I don't get the sense that there's going
to be a lot of immediate action," O'Keefe told Reuters in an
interview after announcing that he will resign, effective March 1,
for health reasons.
O'Keefe said a U.S. congressional budget agreement provided some
greater insight into the Pentagon's budget for fiscal 2014 and 2015,
but many specifics remained unclear, which made it difficult for
companies to assess potential acquisitions.
"It's still a very squishy forecast where the demand is going to
come from," said O'Keefe, who previously served as U.S. Navy
secretary and Pentagon comptroller.
He said the two-year budget agreement left mandatory budget cuts in
place beyond 2015, and overall U.S. military spending looked set to
drop 7 percent to 8 percent from current levels.
Companies that sell weapons to the U.S. military are facing tougher
times after more than a decade of strong growth fueled by the wars
in Iraq and Afghanistan. The Pentagon is already slated to cut its
projected spending by $487 billion over the decade that began in
fiscal 2013, but faces additional sizable reductions mandated by
lawmakers who want to cut U.S. deficits.
Analysts, bankers and lawyers told Reuters last month that the U.S.
budget agreement could provide companies with enough certainty to
set off the most robust series of mergers and acquisitions in the
defense sector in years.
But O'Keefe said he was skeptical.
"I don't doubt that there are discussions and people are thinking
about it," he said. "But there's little supporting evidence to
suggest that somebody will actually follow through."
Buyers and sellers remained at odds over valuations, and company
boards were reluctant to back larger acquisitions, given questions
about which areas of the Pentagon's budget would be hardest hit by
the coming spending cuts, he said.
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O'Keefe said Airbus Group <AIR.PA>, which had once eyed acquisitions
of over $1 billion to expand its presence in the U.S. defense
sector, planned to focus over the coming year on a major internal
reorganization and restructuring.
He said he remained confident that Airbus has good opportunities to
sell equipment to the U.S. military, given its track record on
programs like the U.S. Army's light utility helicopter, which he
said had lower operational costs and the highest rates of being
ready for military missions.
Budget uncertainty was making it difficult for the U.S. Army and
other military services to plan new acquisition programs, a source
of frustration for Airbus and other weapons makers. But O'Keefe said
the country must eventually meet its future national security needs.
"This is a particularly big furball, but it has all the same
characteristics of every other fiscal crisis," he said. "Once the
budget tumult settles down — and it will — there will be a
resurgence of debate over exactly how you define requirements for
what you need and how you meet those requirements."
(Editing by Jan Paschal)
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