In an increasingly fraught geopolitical environment, governments around the world are increasing their spending on defense at record pace.
Global defense expenditure reached US$2.7 trillion in 2024. That represents an increase of 9.4 percent in real terms compared to 2023—the biggest year-on-year increase since the end of the Cold War.
NATO members continue to respond to the perceived escalating threat from Russia. According to the Stockholm International Peace Research Institute, of the alliance’s 32 partners, 18 spent at least 2 percent of GDP on defense last year, up from 11 members in 2023. The US increased its military spending by 5.7 percent to US$997 billion, while European NATO members spent US$454 billion, also up sharply.
Further increases in spending are planned. In France, President Emmanuel Macron now says he will raise the defense budget by €3.5 billion (US$4.1 billion) in 2026 and by another €3 billion (US$3.5 billion) in 2027. This represents a 6 percent increase on top of previously planned increases. In the US, President Donald Trump hopes to raise the defense budget to US$1 trillion in 2026, up 13 percent on 2025.
An evolving sector
Against this backdrop, the defense sector continues to evolve at pace. Defense companies are racing to meet demand from increased spending to develop new products and services in response to evolving threats and to embrace advances in technology.
Research suggests the global defense market will be worth US$875 billion this year, and that it will grow at a compound annualized growth rate of 5.8 percent over the next four years, to reach US$1 trillion by 2029.
The industry is broader than ever, encompassing everything from traditional military hardware to new tools for electronic warfare. Cybersecurity is a hugely important area of focus, and many countries are eyeing the military theaters of the future, including space.
M&A will be a critical tool as the sector transforms itself in the face of these imperatives, with dealmaking already on a clear upward trajectory. Globally, the first nine months of 2025 saw 35 defense deals worth US$3.3 billion, already outstripping total value for all of 2024. At the time of writing (December 4), the figures had reached 41 deals worth US$3.9 billion.
The US has been an important contributor to this increase, with 11 defense transactions worth US$1.1 billion in the first three quarters of 2025, largely on par with the ten deals totaling US$1.1 billion in the same period last year. By December 4, this year’s total had risen to 13 deals with a total value of US$1.6 billion, on par with the value for all of 2024.
Meanwhile, dealmaking is also on the rise across the Atlantic. Europe saw 19 deals worth US$1.2 billion during the first nine months of 2025, compared to 11 deals valued at US$450 million in the same period last year. At the time of writing, this year’s total had risen to 21 deals, already topping the 13 transactions announced for the whole of 2024.
PE power
The largest US defense deal of the year so far saw space tech company Firefly Aerospace purchase national security technology company SciTec for US$550 million in October. Apart from that, the list of US defense deals is dominated by PE-backed buyouts, with sponsor firms looking to build exposure to emerging trends in the sector. Notably, two of the three largest US defense transactions of 2025 so far saw fundraises for investment in space-related technologies.
The biggest of these was the US$300 million Series C round at in-space mobility business Impulse Space, led by Linse Capital. Elsewhere, Point72 led the US$200 million Series C round at Apex, which manufactures spacecraft for commercial and government customers.
The second largest fundraise was another example of how the industry is focusing on emerging technologies: Epirus, which specializes in microwave systems in air defense, completed a US$250 million Series D funding round, led by Centaurus Capital.
Europe leads on corporate deals
By contrast, Europe saw a greater number of strategic transactions. Many of the largest deals were driven by the space research and technology subsector. These included iG TECH, a Hungary-based investment fund manager, acquiring 49 percent of 4iG Space and Defence Technologies, for US$278 million at the beginning of August.
Elsewhere, in another tech-related deal, Meriaura Group of Finland agreed to acquire its compatriot, Summa Defence, for US$196 million. The deal will help shift the group’s focus from marine logistics to defense and technology.
Tech driving defense deals
Industry analysts expect to see M&A continue through the rest of the year and beyond. Major increases in defense spending worldwide are prompting businesses in the sector to rethink their portfolios—both to identify gaps and to divest non-core assets in order to pursue high-growth opportunities. With geopolitical tensions still on a knife-edge, that process will continue. Moreover, dual-use technologies—useful to both military and commercial customers—in industries such as space exploration and cybersecurity are a growing area of focus.
There is also significant interest in the role of artificial intelligence technologies. In the US, for example, the 2025 National Defense Authorization Act included provisions that require the Department of Defense to work more closely with tech companies on AI. Defense companies are moving to acquire AI capabilities, with technology businesses also exploring options in the sector.
Of course, there will be challenges to overcome. In particular, regulators in both the US and Europe are conscious of sensitivities around defense transactions; they are wary of deals involving overseas bidders and eager to avoid over-reliance on a handful of large suppliers. In Europe, for example, while policymakers recognize the need for industry consolidation, they are also eager to encourage competition, and regulation is being updated accordingly.
Conditions are nevertheless ripe for an ongoing resurgence of M&A in both the US and Europe. Increased government spending and the need for innovation and invention will inevitably see both strategic buyers and PE investors step up their hunt for new opportunities.
