Defense technology M&A activity is accelerating as strategic buyers race to secure domestic manufacturing capacity, supply chains, and next-generation military technologies amid a Pentagon push to reshore critical production, according to industry sources.

Unlike prior defense spending booms, acquirers are placing greater emphasis on scalable production infrastructure and manufacturing throughput alongside software and autonomous technologies. Current dealmaking is more structural than cyclical as governments prioritize long-term supply chain security and munitions replenishment.

“There is a strong window for US government and defense contracting for FY26-FY27,” said Scott Stevens, founder of Grays Peak Capital, citing bipartisan support for elevated defense spending. Prime contractors are moving to onshore sub-tier suppliers as the Pentagon prioritizes domestic industrial capacity and advanced production capabilities, he said.

Reshoring has become a central driver of M&A as conflicts in Ukraine and the Middle East expose vulnerabilities in critical components and production capabilities, sources said.

Emerging defense companies including Rocket Lab and Palladyne AI have cited supply-chain resilience and the need for advanced technology as catalysts for recent acquisitions.

Mergermarket data shows a sharp rise in strategic defense M&A in North America from late 2025. Deal volume reached USD 16.3bn in 4Q25, the highest since 2Q19, while deal count hit a record 54 in 1Q26.

The surge among strategics mirrors growing interest from financial sponsors seeking exposure to the US defense sector, as reported in last week’s Dealspeak column.

Source: Mergermarket, data correct as at 13-May-26

Built for battle

“What we’re seeing in defense technology M&A is the convergence of geopolitical instability, sustained modernization spending and a fundamental shift toward software-defined and autonomous warfare capabilities,” said Meghan Welch, head of Aerospace, Defense and Government Services at Brown Gibbons Lang.

Buyers are targeting differentiated assets that can support faster deployment, resiliency and the integration of commercial technologies into defense systems, she said. They are also showing growing interest in manufacturing assets tied to the defense industrial base, reflecting heightened concern around supply chain disruptions and production capacity constraints.

George Barsom, managing director at Auxo Capital Advisors, said buyer interest remains concentrated around drones, autonomy, defense electronics, sensing, secure communications and electronic warfare, as well as suppliers tied to bottlenecks in missiles, interceptors, and motors.

“In many cases, the bottlenecks are not the headline systems themselves, but the inputs and subcomponents that slow production down,” Barsom said.

Buyers are prioritizing companies that can manufacture at scale rather than develop concepts alone, he added. “It’s one thing to have exposure to AI, autonomy, or next-generation systems. It’s another to be able to deliver at speed, at cost and at meaningful volume,” Barsom said.

Stevens described drones as “the new bullets of battle,” noting that unmanned aerial systems are rapidly expanding into marine applications while US drone manufacturing capacity accelerates. Ammunition manufacturing, logistics, cybersecurity, training and simulation, and space infrastructure are also key investment themes, he added.

Target acquired

Aaron Ambrose and Jonathan Lazarow, co-chairs of the corporate group at law firm Ambrose Lazarow, said strategic acquirers are driving much of the current deal activity as companies look to expand market position, secure technologies and enter into joint ventures or minority investments.

Scarce, differentiated assets with strong program alignment, proprietary technology, or exposure to priority budget areas continue to command premium valuations, Welch said, while “more traditional, labor-intensive, or lower-growth businesses are trading at more normalized or compressed multiples.”

Strategic buyers are often willing to pay higher multiples than sponsors – up to 20x EBITDA in some cases – to secure critical capabilities, noted a sector banker, citing Leidos’s USD 300m acquisition of cybersecurity company Kudu Dynamics in May 2025.

Rules of engagement

Lenders are increasingly comfortable financing defense-related assets with visible backlog, recurring program work and strong compliance infrastructure. The current risk-adjusted lending environment for defense and government-adjacent contractors is the strongest in decades, said Stevens.

Regulatory scrutiny and government reviews are playing a larger role in deal execution. “Buyers are spending more time evaluating customer concentration, supply chain dependencies, cybersecurity, and alignment with federal priorities, impacting both timelines and deal structures,” Welch said.

Despite those complexities, sources expect dealmaking momentum to continue into 2026.

Welch described the current market as “less about a cyclical recovery and more about a structural repricing of strategic relevance within national security.” Companies aligned with next-generation defense priorities — particularly around autonomy, resiliency, digital modernization, and advanced manufacturing — should remain highly attractive to strategic and financial buyers over the long term.