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M&A emerges as a key lever for growth and innovation
Shifting national security priorities are driving fresh demand for next-generation capabilities in defense technology, munitions, and space. With innovation cycles accelerating, M&A has become a primary growth lever in aerospace and defense (A&D). In recent months, dealmaking has shifted from recovery to purposeful repositioning, as buyers target assets that accelerate modernization. Large conglomerates are divesting to concentrate on core programs, while private equity (PE) and new entrants are using carve-outs to build platforms that can span military and civilian purposes. Sellers are prioritizing simplification, unlocking value, and capital recycling. The result is a market defined by sharper portfolios, more disciplined balance sheet strategies, and deal activity that increasingly serves as a catalyst for innovation and long-term growth. Key trends to watch:
- Strategic portfolio rationalization and renewed IPO momentum: Major corporations are divesting underperforming assets to redeploy capital into defense tech, munitions, and space. Proceeds from more than $15 billion in global aerospace and defense (A&D) transactions are being reinvested into high-growth segments, while spin-offs and IPOs signal a reopening of public markets for innovators.
- Defense tech growth fueled by prime contractor partnerships: Over the last six months, collaborations in AI, cyber, autonomy, and electronic warfare have proliferated. Prime contractors are favoring minority stakes, joint ventures, and targeted tuck-ins to access proven innovation while retaining agility and managing integration risk.
- Selective consolidation across the space economy: Deal value in the space sector is consolidating around vertically integrated satellite and launch platforms. Companies are partnering to reduce capital intensity, accelerate low-Earth-orbit constellation deployment, and align with Space Development Agency and “Golden Dome” defense initiatives.
- Private equity as the new accelerator: Funds are deploying record capital into carve-outs and mid-tier defense suppliers, building scalable technology platforms that can be used for both military and civilian purposes. Speed to scale and operational excellence now outweigh financial engineering as PE’s differentiator.
- Contracting reform reshaping industry economics: Governments are pivoting from cost-plus to outcome-based contracting, rewarding disciplined operators with potential margin expansion and more predictable cash flow. Companies are positioning their services as off-the-shelf, lower-cost options for militaries struggling with budget constraints. Buyers are tightening diligence around execution maturity and cost control.
- Innovation as the competitive frontier: For both strategic and financial investors, deals are the new R&D strategy, enabling rapid acquisition of technologies, talent, and market access. Those who act now to align portfolios with emerging defense priorities will define the next generation of A&D leaders.
Looking ahead
Defense tech—encompassing AI, autonomy, cyber, space, and mission software—has become the sector’s growth engine. Dealmaking is increasingly shaped by how fast buyers can align portfolios to these capabilities and how effectively they can navigate evolving funding cycles, regulatory oversight, and exit dynamics.
“The A&D sector is experiencing a capability-driven transformation where strategic fit trumps financial metrics in determining deal success and long-term value creation.”
Akhil Bhushan,US Aerospace and Defense Deals LeaderThe bottom line: What A&D dealmakers should watch in 2026
Rising defense budgets and geopolitical tensions are creating favorable conditions for premium valuations and innovative partnerships to move faster than the market. Capability-driven, strategic transactions—particularly around defense tech—now fuel sector M&A. Innovation is the battlefield, and companies that pursue smart, decisive deals will win the future.
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