Key findings
Legacy complexity continues to face valuation pressure as investors reward portfolio clarity and pure-play platforms.
Carve-outs, vertical integration, and next-gen defense technology are driving premium valuations.
European rearmament and US defense funding are extending visibility through 2029 and beyond.
The top five A&D primes ended FY2025 with $1.36 trillion in combined backlog, up 23.7% year over year.
Dual-track processes are accelerating as strong investor demand drives higher multiples across strategic, private equity (PE), venture capital (VC), and public markets.
The first half of 2026 confirmed that capital is repricing around who can deliver. The five largest defense primes closed fiscal 2025 with $1.36 trillion in combined backlog, a 23.7% increase, while individual order books ranged from flat to growth of more than 30%. At the same time, several primes are divesting mature or noncore assets, reorganizing around growth priorities, and acquiring supply chain capacity to protect production schedules.
European rearmament has become one of the sharpest catalysts for cross-border M&A. NATO allies are increasingly treating higher defense spending as a long-term planning assumption, and European revenue has grown double digits across major US contractors. The opportunity is two-directional: US strategics and private equity buyers can acquire into Europe’s expanding defense budgets and fragmented supplier base, while European primes can use elevated valuations to access US capabilities. Export controls, International Traffic in Arms Regulations (ITAR), Foreign Ownership, Control, or Influence (FOCI), and national security reviews will make diligence and integration planning central to value creation.
The market is also rewarding portfolio clarity. Legacy complexity is being penalized through charges, reach-forward losses, and remediation campaigns, while software-first, dual-use, space, autonomy, counter-UAS (Unmanned Aircraft System), missile defense, and MRO (maintenance, repair, and overhaul) assets are attracting premium multiples. Production bottlenecks across aircraft, engines, shipbuilding, and the broader Tier 2/3 supplier base make M&A a practical fix for capacity that organic investment cannot close quickly enough.
Key M&A trends set to influence aerospace and defense
Three forces are likely to shape A&D dealmaking through the second half of 2026 and into 2027. First, commercial and defense production constraints are turning supply chain capacity into a deal thesis. Aircraft, engine, submarine, munitions, and MRO backlogs point to multiyear demand, but qualified capacity remains scarce. Vertical integration, PE-backed roll-ups of Tier 2/3 suppliers, distressed acquisitions of qualified facilities, and technology deals that improve throughput should remain active areas for dealmakers.
Second, the valuation gap between legacy platforms and next-generation defense technology is widening. Portfolio rationalization will remain active as primes divest mature assets, separate noncore units, and reinvest into space, autonomy, spectrum dominance, missile defense, cyber, and software-enabled capabilities. Premium valuations will depend on credible synergy underwriting and a clear standalone operating model, especially in carve-outs.
The SpaceX IPO has further accelerated the repricing of aerospace and defense around software-enabled, dual-use, and space-based capability. SpaceX's influence is reshaping investor expectations across launch, satellite communications, autonomy, missile defense, and defense-adjacent AI, creating valuation lift for both public and private next-generation defense technology companies. This momentum is also driving increased dual-track activity, as companies pursue both IPO and M&A processes to capitalize on strong investor demand, abundant capital deployment, and premium valuations for differentiated next-gen A&D assets.
Third, European rearmament is creating durable visibility for cross-border M&A. Strategics and PE buyers should prepare for fragmented supplier consolidation.
“A&D dealmaking is increasingly capability-driven as defense funding, European rearmament, and commercial aerospace demand create durable, long-term growth visibility that rewards differentiated technology and execution.”
Akhil Bhushan,US Aerospace and Defense Deals LeaderThe bottom line: What aerospace and defense dealmakers should watch
A&D dealmaking is being sustained by structural demand rather than cyclical recovery. European rearmament, US defense funding through 2029, and commercial aerospace backlogs create long-term visibility. The winners will move decisively on carve-outs, vertical integration, supply chain capacity, and next-generation defense technology while underwriting regulatory, operational, and integration risks early.
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