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Resurgent demand for defense capabilities shifts focus to efficiencies and next generation research
Global instability and policy changes from the new administration are reshaping the aerospace and defense sector. Trade, federal spending and foreign policy shifts are affecting dealmaking. Companies are focusing on optimizing portfolios and the rising demand for next generation capabilities.
Main themes and drivers for A&D deals:
- Continued optimization — Companies are reviewing business portfolios to focus on core competencies, shed underperforming business units and invest in high growth areas such as cybersecurity and government technology services.
- Rise in spending — Defense budgets continue to rise globally, driving demand for modernization, local production and next generation research. This rise is further fueled by continued global conflicts and the resulting uncertainty.
- Technology disruption — Companies with advanced technological capabilities, particularly those integrating AI, autonomy and analytics into defense, are becoming top acquisition targets.
- Supply chain resilience — The A&D supply chain remains persistently fragile, with bottlenecks and delays driving companies to consider acquiring or reinforcing suppliers. However, some companies are maintaining focus on mission critical core competencies and considering divesting noncore businesses.
- The next frontier — With new threats to satellites and space assets, defense leaders are calling for increased investment in space technology and capabilities.
- Commercial aviation — Air traffic is expected to grow in the next decade. Sustainability regulations and insufficient infrastructure could fuel targeted investments and new market opportunities. Infrastructure gaps may spark focused investments in airport upgrades and next-gen mobility in the medium to long term.
Note: The source used in the 2025 midyear outlook is S&P Global Market Intelligence.
On the horizon
Innovation and performance are the current watchwords in the A&D sector, as the demand for advanced capabilities grows alongside the rapid evolution of defense. To remain competitive and secure lucrative contracts, companies must ramp up production in their strongest areas. This necessitates a thorough evaluation of their portfolios to determine where investments should be made and where divestitures are warranted. By concentrating on core capabilities and high-performing segments, companies can enhance operational efficiency and profitability while focusing on areas where they possess both expertise and a competitive edge.
Corporations as well as private equity (PE) appear aligned on the shift toward improving innovation and core performance through strategic deals. Partnerships with companies and firms, both within the A&D sector and across other industries (technology being a prime example), can help foster growth and reinforce (or re-introduce) a culture of innovation.
With market dynamics and potential policy changes on the horizon, coupled with substantial reserves of dry powder, PE firms are poised for strategic acquisitions. Strategic stakeholders can acquire disparate business segments from prime contractors, assembling leaner portfolio companies capable of superior performance under private management.
Firms (including PE and venture capital players) that have already targeted key pain points, such as supply chain and materials manufacturing, now face fewer regulatory constraints to enhance efficiency in these notoriously challenging areas. A targeted acquisition strategy coupled with opportunistically pursuing corporate assets can help these firms achieve substantial returns and provide a much-needed exit for divested corporate assets.
"This year is not about chasing scale — it's about precision plays. The winners will be those who invest in capability, resilience and alignment with mission-critical priorities."
Akhil Bhushan,US Aerospace and Defense Deals LeaderRising to the challenge
As both corporations and PE firms seek solutions and opportunities to enhance capabilities and performance, deals remain a primary channel for achieving value, driving innovation and preparing the aerospace and defense sector to meet tomorrow's challenges, both domestic and foreign.
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