The world is rearming itself at a pace not seen in a generation. Global military expenditure reached an estimated US$2.6 trillion in 2025, according to the International Institute for Strategic Studies, and the trajectory is only set to steepen. With the US Congress approving a defense budget exceeding US$1 trillion for 2026, a 13 percent increase, and European NATO members recording their sharpest annual spending increases since the end of the Cold War, the financial firepower behind the sector has rarely looked more formidable.
Much of that spending is not going toward tanks and troops, but to technology. Drones, AI, autonomous systems, space-based sensing and cybersecurity are redefining how conflicts are fought and won—and, in turn, how defense companies are valued, acquired and funded.
Various dealmakers and private investor groups have taken notice. Venture capital investment in defense tech reached a record US$49.9 billion in 2025, up 83 percent on the prior year, according to PitchBook data. The number of VC firms actively investing in the sector, meanwhile, grew by 41 percent.
These are not sector-specific anomalies. Defense technology has moved from the periphery of startup funding to one of the only categories keeping pace with the explosive rise of frontier AI.
US budget firepower drives M&A
No market illustrates the defense tech transformation more vividly than the US. While military spending fell by 7.5 percent to US$954 million in 2025, Congress approved a budget exceeding US$1 trillion for 2026—and that figure could rise to US$1.5 trillion if President Donald Trump's latest budget proposal is accepted. This is in addition to the fact that the US defense budget is already the largest in the world. The direction of travel is clear.
Set against this fiscal backdrop, overall defense sector M&A in the US has followed at pace. Deal volume rose 20 percent year on year to 18 transactions in 2025, while value nearly tripled to US$4.6 billion from US$1.7 billion. In 2026 so far (up to May 22), there have been 14 deals worth US$1.2 billion—both figures well ahead of those for the same period last year.
Notably, the three largest defense deals globally in 2025 and Q1 2026 were all US transactions, and all were driven by technology or technology-adjacent capabilities.
Several key deals reveal where the subsector is heading. For instance, CACI International's US$2.6 billion acquisition of ARKA Group from Blackstone Tactical Opportunities—CACI’s largest-ever deal—was a play on space-based optical and sensor technology, combined with agentic AI for geospatial intelligence. The move shows a legacy defense contractor seeking to build a vertically integrated position in national security technology.
Firefly Aerospace's US$855 million acquisition of SciTec points in a similar direction, where the buyer is acquiring a defense company with deep expertise in satellite-based missile warning and tracking. Space systems continued to dominate US defense tech dealmaking in Q1 2026. AE Industrial Partners also moved to acquire a stake in L3Harris Technologies' space propulsion assets, underscoring how PE is using M&A to gain exposure to sectors that were, until recently, the exclusive preserve of government contractors and traditional prime contractors.
Spending, startups and deal flow
The key drivers are self-reinforcing. Government spending at record levels is creating demand, which in turn is attracting private capital. Private capital, then, is enabling startups to develop capabilities at pace, and those capabilities are attracting further government contracts. The result is a flywheel pulling in participants from well beyond the traditional defense universe.
Cross-sector dealmaking is accelerating the cycle. Technology companies and platform businesses are entering the sector as investors and acquirers, while the National Defense Authorization Act continues to streamline contracting pathways for non-traditional vendors. This is lowering barriers to entry in ways that are directly fueling M&A activity.
But the market is not without friction. Scrutiny by the Committee on Foreign Investment in the United States of defense-related transactions remains intense, and the pool of targets is still relatively small. All this in a sector characterized by high barriers to entry and a limited number of companies with the necessary clearances and track records to win classified contracts. At the highest end of the market, valuations have moved rapidly, raising questions about whether current multiples can be sustained.
Urgent rearmament in Europe
If the US defense tech story is defined by scale, Europe's is one of urgency. Defense spending across the continent surged roughly 14 percent in 2025, propelled by rearmament programs across NATO members and the ongoing war in Ukraine. With US geopolitical policy growing less predictable and European governments increasingly focused on reducing reliance on non-European suppliers, the push for digital and technological sovereignty has become a central organizing principle of the continent's defense strategy.
The deal data reflects this shift. Europe surpassed the US in total defense deal volume in 2025, with transactions rising 85 percent year-on-year to 24, while value more than doubled to US$1.3 billion. Once again, these are tech-related deals. At the time of writing (May 22), there were 11 deals worth US$170 million in 2026. Both figures are marginally down on the same period last year, but there have been several transactions with undisclosed values.
The standout transaction was Helsing's €600 million Series D funding round, led by Prima Materia, the investment vehicle of Spotify founder and Helsing chair Daniel Ek. The raise pushed Helsing's valuation to around US$14 billion, making it the most valuable defense technology startup in Europe. Helsing’s pitch is explicitly built around European sovereignty: The continent cannot afford to outsource the technology underpinning its security to non-European providers. Governments in Germany, the UK and the Nordic and Baltic states have been persuaded, with the company winning major contracts from allied militaries across multiple domains.
Other notable deals include Hungarian investment fund manager iG TECH acquiring a 49 percent stake in 4iG Space and Defence Technologies for US$278 million, while Meriaura Group of Finland agreed to acquire compatriot Summa Defence for US$196 million in a deal marking the acquirer's pivot from marine logistics to defense and technology. Rheinmetall, the German defense giant that has become one of Europe's most active acquirers, took a stake in Croatian robotics company DOK-ING, adding autonomous vehicle technology to a portfolio already spanning multiple defense tech subsectors.
Shared drivers and conviction
The deal drivers in Europe are broadly similar to those in the US, but with some distinctive characteristics. Rising government budgets are a catalyst on both sides of the Atlantic. In Europe, however, the imperative of rebuilding defense capability independently of the US has added a layer of political urgency. The EU's ReArm Europe initiative and the introduction of a dedicated commissioner for defense and space signal an institutional commitment to sustained investment.
Private investment is another overarching theme. PE has returned to the front line, with sponsor interest in defense tech growing sharply after years of relative distance from the sector on ethical grounds. The reframing of defense investment as support for democratic values has opened the asset class to a broader range of capital.
Challenges are real but manageable. The regulatory environment, including enhanced FDI screening across the EU and UK, adds complexity, particularly for cross-border transactions. The pool of targets is limited and valuations are moving rapidly. Manufacturing scale remains an unsolved problem: Many of Europe's most exciting defense tech startups have proven their technology but have yet to demonstrate the capacity to produce at the volumes modern military procurement requires.
Where defense tech M&A goes from here
The outlook for defense tech dealmaking on both sides of the Atlantic is exceptionally strong and structurally entrenched. The Pentagon's fiscal year 2027 budget proposal includes US$54.6 billion for the Defense Autonomous Warfare Group alone—a more than 24,000 percent increase on the prior year's allocation. In Europe, the combined momentum of rising government budget allocations and institutional EU support is creating conditions for sustained M&A activity that could persist well beyond 2026.
The more interesting question is convergence. Traditional defense contractors are acquiring startups to buy capabilities they can no longer develop from scratch internally on competitive timelines. VC-backed defense tech companies are maturing into credible strategic acquirers in their own right. And the boundary between the defense sector and the wider technology industry is dissolving, meaning the universe of relevant companies will only widen.
The sector is being rebuilt from the software layer up, and the M&A market is moving with it.
