Defence companies are primed for a surge in deal activity as many look to deploy growing cash piles 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 is expected to drive dealmaking in the next few years as companies look to expand in fast-growing areas.
The leading 15 defence contractors are forecast to log free cash flow of about $50bn in 2026, according to an analysis by Vertical Research Partners for the Financial Times — almost double their combined cash flow at the end of 2021. Although larger companies are expected to continue to spend that money on share buybacks and higher dividend payouts, deal activity is also expected to increase. Michael Sion, partner at consultants Bain & Co, said he expected a pick-up in aerospace and defence M&A, and forecast an influx of funding from private equity and venture capital firms. “Many companies are looking to expand what they offer to get ready for advanced technologies,” he said. Larger companies, he added, would chase fast-growing parts of defence such as space and defence electronics. Meanwhile, the value of venture capital deals in the defence sector has increased 18-fold in the past decade, according to a new report by Bain. Growth has been driven in part by an increasing convergence of commercial and defence technologies. Many investors, in particular in Europe, have also been wary of backing the sector over ethical concerns but attitudes are changing following Russia’s invasion of Ukraine almost three years ago. Recent corporate deals in the industry include BAE System’s acquisition of Ball Aerospace, a US-based supplier of mission-critical space systems, for $5.6bn, which was announced in 2023. US defence prime L3Harris agreed to buy rocket engine maker Aerojet Rocketdyne at the end of 202