Kratos Defense & Security Solutions [NASDAQ:KTOS] is being viewed as a potential acquisition target again as M&A in the defense sector heats up, said two sector advisors and an analyst.

The San Diego-based company, which has a USD 3.37bn market cap, could be targeted in 2025 or 2026 as it racks up contract wins for its tactical drones, spatial awareness business, and hypersonic scramjet technology, said the analyst.

Defense dealmaking is picking up on the back of rising weaponry spend in Ukraine and Israel, trouble spots that have forced countries to reassess their war readiness.

Numerous recent deals include Honeywell’s [NASDAQ:HON] buy of CAES from Advent International for USD 1.9bn, KBR’s [NYSE:KBR] acquisition of LinQuest for USD 737m and Lockheed Martin’s [NYSE:LMT] buy of Terran Orbital [NYSE:LLAP] for USD 450m.

Kratos has long been considered an acquisition target for a larger player, one of the sector advisors said. He added that with a market cap of around USD 3bn, Kratos is at a size that is attractive to larger defense players.

Kratos could be taken out by a defense major such as Northrop Grumman [NYSE:NOC], which would target Kratos for its drone portfolio, its engine technology, and for its growth, said the analyst. By acquiring Kratos, Northrop would build on its USD 9.2bn acquisition in 2018 of Orbital ATK, a provider of rocket engine technology, the analyst added.

Northrop and Kratos have worked together in the past, so a deal there would make sense, the two sector advisors said.

Kratos’s combat drones have been available for a few years – since 2018 for the UTAP-22 Mako, 2019 for the XQ-58A Valkyrie, and 2020 for its swarm drone, the X-61A Gremlin – but have never been appropriated by the Department of Defense. That is expected to change in 2025 as the use of continuing resolutions – a stop-gap budget measure aimed at avoiding government shutdowns – gets penalized.

Kratos’s Unmanned Systems business unit, which includes sales of its drones, has had flattish annual product revenue of USD 206m in 2023 and USD 217m in 2022. However, revenue is expected to ramp in 2025 and 2026 as the US government starts to appropriate combat drones to revamp its air power and counter China’s drone swarms, said the analyst.

Kratos has other assets that are about to see a growth inflection, which also could act as catalysts for a takeover bid, says the analyst.

Its turbine technologies – used in unmanned aerial vehicles and cruise missiles – and its hypersonic scramjet engine technology will add to product revenue in 2024, become meaningful in 2025, and enter their own growth phase in 2026, said the analyst. Northrop would find this especially attractive, he said.

Its Space Domain Awareness business, which helps commercial satellite companies track space junk but can also be used in space defense, should see revenue ramp in 2025 and achieve global adoption in 2026, added the analyst.

Other potential buyers of Kratos, one of the sector advisors said, include UK-based BAE Systems [LON:BA], which has a large US footprint, along with Lockheed Martin [NYSE:LMT].

L3Harris [NYSE:LHX], which acquired propulsion systems maker Aerojet Rocketdyne in 2022 in a USD 4.7bn deal, also could look at Kratos to bolster its presence in the rockets space, he said.

Kratos has been awarded a number of contracts, which could also make the company attractive, a third sector advisor said.

In January, the company announced it was awarded approximately USD 50m in awards for products and hardware, including for and in support of counter unmanned aerial systems (CUAS), air defense and radar systems. This was followed up in March with another contract win as the company announced it was awarded a USD 499m contract for the design, build, test, and delivery of functioning anti-tamper solutions that will be ready for follow-on production to be integrated into a broad range of Department of Defense programs.

Kratos did not respond to requests for comment.