The Aerospace Industries Association estimates that the U.S. aerospace and defense (A&D) industry employs about 2.5 million workers, which is approximately 2% of the nation’s total employment base and 20% of the U.S. manufacturing workforce. This means that both growth and contraction in the A&D industry can have a significant impact on the U.S. economy.

In previous decades, times of growth in the A&D industry were steady and extended over many years. During growth periods, A&D manufacturers’ business transformation happened through organic growth and mergers and acquisitions. These events typically have a well-planned timeline and strong execution strategies, and they create value for all parties involved.

During economic contractions, in contrast, companies usually have a short timeline for divestitures because they must take quick and decisive action due to cash shortfalls and the need to finance ongoing operations. Since 2000, there have been three contractions due to exogenous events: Sept. 11, 2001; the financial crisis of 2008; and the novel coronavirus in 2020. These shocks have significantly affected the A&D industry.

In response to these events and after economic downturns start, there are multiple paths companies can take to improve financial conditions. The commercial airlines and auto industry during contractions generally take the path of restructuring through Chapter 11 reorganizations. A&D companies usually take a more complex transformation path of downsizing through divestitures to generate cash to survive until the next growth cycle begins.

The impact of the 2001 and 2008 events forced many A&D manufacturers to transform their businesses through divestitures. Those companies had to choose this path because of poor planning, ineffective execution or cash disbursements to shareholders during years of growth, which led to the need for cash infusion and financial restructuring during the contractions after the economic downturns.

Once a contraction starts in the A&D industry, three phases ensue. First come significant expense reductions such as cuts in discretionary spending, business travel and research and development programs. Second, workforce reductions such as furloughs and layoffs are made. Third, financial restructuring such as plant rationalization, consolidations and business unit divestiture is undertaken. Due to the sudden contraction caused by the COVID-19 crisis, the A&D industry has moved swiftly through the first two phases and is now entering the third. There will be many divestitures of business units that larger companies designate as noncore assets, which they will sell to generate cash to support operations of their core assets.

During all divestitures, three areas of focus should be addressed to ensure successful execution. First are operational considerations such as culture and employees, environment, physical asset reviews and product delivery commitments. Second are financial considerations of the transaction, including appropriate financial modeling for the business units being divested. Also, cost allocations, transition support services and creditor relationships of the divesting company need to be identified and transitioned. Third are commercial obligations such as legal arrangements with customers and suppliers. These contracts should be reviewed to ensure they are appropriately novated and transferred.

These three areas of focus often are not diligently followed in challenging times of contraction, and there is usually a rush through this third phase of divestiture. This can be damaging to both companies involved.

Philip Vaillancourt from Accenture’s A&D practice points out that many companies fold an acquired company into their existing inefficient processes, systems and operating model—missing the chance to reinvent for the future and leapfrog the status quo. The result is usually weak bottom-line synergies and anemic topline growth.

Accenture Strategy analyzed 800 global merger and acquisition transactions, and just 27% resulted in both operating-margin improvement and revenue growth. Accenture noted two main factors in long-term success stories for deals. First, prior to the close of the deal, leaders created a long-term blueprint for the intended synergies and the operating model. They seized the opportunity to create an intelligent enterprise, reimagining the way work is done, and they transformed their workforce. Second, they ensured that an executive with financial expertise remained involved after the deal closed to see that the company achieved the expected financial value from that blueprint.

These steps are especially critical during these challenging times so that the divesting company is ready to grow again and the acquiring company is well-positioned and organized with its newly added business unit.

Alex Krutz is managing director at Patriot Industrial Partners.

The views expressed are not necessarily shared by Aviation Week.