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Reshaping portfolios and expanding global partnerships in a shifting regulatory environment
Over the past six months, the aerospace and defense (A&D) sector has aligned with global mergers and acquisitions (M&A) activity, though at a slower and more measured pace. There’s been a marked increase in portfolio reshaping as companies aim to streamline operations and focus on core assets.
Meanwhile, heightened geopolitical tensions and political shifts led to strategic partnerships, including with international allies, to mitigate risk and capture potential benefits. Strong cash flow in A&D companies and a supportive stock market are expected to drive M&A activity in the coming quarters.
Key trends include:
- Portfolio reshaping: Demand for emerging technology, along with increased competition from new entrants, has prompted major players to rethink their strategies. They are considering divesting non-core assets to streamline operations, pooling capital to modernize core-competencies, and pursuing innovation by acquiring venture capital-backed startups.
- Geopolitical pressures: Rising defense budgets in Europe, Australia and South Korea have significantly influenced sector growth. European nations, particularly NATO members, increased spending due to the conflict in Ukraine. Australia boosted its defense investments, aligning with Indo-Pacific security priorities and initiatives like AUKUS, a trilateral security partnership between Australia, the United Kingdom and the US. Similarly, South Korea raised its defense budget to counter regional threats, focusing on missile defense and advanced technology. In the US, the new administration is expected to continue increasing defense spending with a domestic focus.
- Regulatory uncertainty: A&D deals continue to face regulatory challenges, as seen with the Department of Justice’s (DOJ) intervention in a recent airline acquisition. Additionally, the recent presidential election has introduced uncertainty, as potential policy changes continue to impact M&A strategies in the sector.
- Partnerships and joint ventures (JVs): The sector increasingly favors JVs over traditional acquisitions. This shift is due to JVs being less complex, having fewer regulatory hurdles and offering increased protection against risks. JVs also support the development of advanced capabilities through innovation achieved via acquisition.
Note: The primary M&A data source used in the 2025 outlook is S&P Capital IQ.
- Strategic expansion in the space sector: M&A activity within the space sector has surged, propelled by the growing demand for satellite-based communications, defense capabilities and low-Earth orbit (LEO) infrastructure. Companies are increasingly acquiring others to establish end-to-end capabilities in autonomous satellite networks and in-orbit servicing, aligning with national security and commercial priorities. Additionally, the private sector’s influence on the incoming administration may elevate space as a strategic asset, driving more investment and innovation and leading to further consolidation of the sector.
- Commercial consolidation: Intensifying competition and operational inefficiencies are prompting small- and mid-sized aerospace firms to pursue strategic consolidation. Larger players are leveraging M&A to secure critical supply chain capabilities, mitigate production bottlenecks and achieve economies of scale, particularly in high-demand segments such as narrow-body aircraft and aftermarket services.
Strategic thinking
In a shifting M&A landscape, A&D companies are adapting strategies to balance growth with risk mitigation. Increased regulatory focus has led to a shift toward partnerships with domestic and allied nations and reduced reliance on foreign capital. Additionally, many companies are prioritizing asset-light models, often through JVs and partnerships, to pursue emerging capabilities. However, they must navigate geopolitical tensions and capital constraints to align with current defense spending priorities and protect against unpredictable market shifts.
Growing global conflicts and continued focus on domestic security have led to increased defense budgets worldwide. Both US prime contractors and international defense firms continue to receive significant new orders, indicating strong momentum for the defense sector as countries invest in their defense infrastructure.
“M&A drivers are positive although A&D deal execution is measured. Easing interest rates, geopolitical tensions and new technologies will contribute to M&A activity in the near term.”
The bottom line
The A&D deals market is in a transformative phase, with trends indicating a shift toward streamlined portfolios, strategic partnerships and heightened geopolitical awareness. As companies adapt and look to deploy cash on the balance sheet, the emphasis will remain on sustainable growth, resilience, aerospace growth trends and supplier consolidation plus alignment with evolving defense priorities.
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