Bruce Andrews, partner and Joseph Lakaj, analyst, Alderman and Company, assess the impact in mid-market M&A activity in aerospace as firms realign their portfolios towards the defence sector

In recent years, substantial amounts of capital have been invested into the defence market.

One recent example is start-up defence-tech company Anduril’s $2.5 billion Series G funding in June.

This influx of capital into the defence industry has come from a wide variety of sources, including venture capita firms that traditionally have invested into early-stage companies in industries other than the defence supply chain.

The goal of these VC firms is to achieve high rates of return because of the extremely rapid growth of these companies.

Since our founding, 24 years ago, we have not seen this level of VC activity in the defence Industry.

Not only are VCs now investing in the defence industry, but we are also now seeing traditional investors and defence contractors reshaping their portfolios in favour of the Defence Industry.

Portfolio reshaping is not new; investors and contractors have always reviewed their portfolios on a regular basis to reshape their holdings to align with their current strategic needs.

Some recent examples include L3Harris’s divestiture of its Commercial Aviation Solutions business to TJC (formerly The Jordan Company) this past March.

Or Northrop Grumman’s divestiture of its mission training and satellite ground network communications software business to Serco in May, with both firms mentioning their respective divestures are a strategy to focus on growing core businesses.

The net result is a shift in the respective company, to align with its latest goals and strategy, including advancements in technology, or more likely, future targeted acquisitions, again as part of executing a portfolio reshaping process.

Investments in either core competencies or advancements in technology highlight that prime and mid-tier aerospace and defense firms are now prioritising technology over scale.

This reshaping includes targeted acquisitions and divestitures that bolster core capabilities and align with new mission-critical priorities.

These areas of investment and portfolio reshaping in the defence industry is driven by US DOD budget, and NATO, directives to invest in high-performance segments such as unmanned systems, AI, cybersecurity, space (especially low orbit applications), quantum computing, and advanced manufacturing technology.

The goals of these companies are to align their overall strategy to the current global insecurity and political environment to include enhancing operational efficiency, securing lucrative contracts, and driving a compelling competitive edge in the defence M&A market.

We are seeing ever increasing defence shaping transpiring such as the recent sale by RTX of their Actuation and Flight Control Division from Collins to Safran, Triumph selling its Product Support Division to AAR Corp, and now Honeywell looking to sell its Productivity Solutions and Services Division and its Warehouse and Workflow Solutions Division.

We at Alderman and Company believe that the current environment of portfolio shaping toward more defence focus among companies in the aerospace and defense sector not only presents challenges but also significant opportunities for middle-market A&D companies.

On a macro scale such large-scale divestitures and acquisitions act as a catalyst and stimulate increased M&A activity particularly in the A&D middle market.

As the primes and investors (including but not limited to private equity firms) are actively seeking to strengthen their capabilities in innovative technology such as AI, hypersonic weapon systems, low orbit satellite technology, significant opportunities are becoming available for suppliers with capabilities in these new specialty areas.

Such companies will not only be actively sought by the primes looking for suppliers but will also likely increase the valuations of these suppliers in the marketplace and may lead to additional M&A activity.

The broad conclusion, driven by our analysis of the current global geopolitical situation, the analysis of the proposed US DOD budget requests for FY 2026, and the commitments of our NATO allies to increasing their defense budget spend to 5% of their GDP versus the previous 3% commitment is that M&A activity in the sector is likely to be strong in the year ahead.