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Defense companies are bracing for an uptick in deal activity as many look to deploy growing pools of cash to invest in technologies such as artificial intelligence, sophisticated drones and space systems.
Global conflicts, including the war in Ukraine, have accelerated the development of new technologies, which are expected to drive deal-making in the coming years as companies look to expand into fast-growing areas.
The top 15 defense contractors are projected to record free cash flow of about $50 billion in 2026, according to an analysis by Vertical Research Partners for the Financial Times — nearly doubling their combined cash flow at the end of 2021.
Although larger companies are expected to continue spending that money on share buybacks and higher dividend payments, deal activity is also expected to pick up.
Michael Sion, partner at consultants Bain & Co, said he expected an increase in aerospace and defense M&A and predicted an influx of funding from private equity and venture capital firms.
“Many companies are looking to expand what they offer to prepare for advanced technologies,” he said. Larger companies, he added, will go after fast-growing parts of defense such as aerospace and defense electronics.
Meanwhile, the value of venture capital deals in the defense sector has grown 18-fold in the past decade, according to a new report from Bain. Growth is driven in part by an increasing convergence of commercial and defense technologies.
Many investors, particularly in Europe, have also been wary of backing the sector over ethical concerns, but attitudes are changing after Russia’s invasion of Ukraine almost three years ago.
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Recent corporate deals in the industry include BAE System’s acquisition of Ball Aerospace, a US-based supplier of mission-critical space systems, for $5.6 billion, which was announced in 2023. US Defense Minister L3Harris agreed to buy rocket engine maker Aerojet Rocketdyne in late 2022.
In November, drone maker AeroVironment said it would buy BlueHalo, a company known for its drone and anti-drone technology, for about $4.1 billion in an all-stock transaction. Wahid Nawabi, AeroVironment’s chief executive, said the company planned to be a “next-generation” prime contractor that would focus on “defense technology.”
In a recent interview with the Financial Times, Nawabi said he wanted to create a company that did “all the things that the (US) Department of Defense is focused on and needs.” This included, he said, “unmanned systems, stray munitions, space communications . . . electronic warfare and cyber security”.
“There is likely to be activity in what you might call the ‘defense technology’ space such as drones, AI and lasers,” said Robert Stallard, analyst at Vertical Research Partners. But consolidation at the top of the sector among the big prime contractors is unlikely, he added.
“Even with Trump’s ‘anything goes’ Justice Department, the US defense industry is super-consolidated at the core level,” Stallard said.
In Europe, meanwhile, “there should be consolidation and M&A, but getting governments to agree is another thing,” Stallard said.
Joint ventures and unification are a “much easier step, allowing Europeans to join forces without animating politicians about the loss of sovereign capacity”.
Bain’s Sion said that given the modernization needs of the defense industry, there was an opportunity for private capital to play a bigger role. Private capital, he said, could help fill a “funding gap” between U.S. defense requirements and defense budgets.
It can help to solve some of the “challenges of the defense industrial base”, such as “increasing capacity, improving operations and delivery”, he added.
