Against a global backdrop of rising geopolitical turmoil, surging demand for missiles and hypersonic weapons is helping drive dealmaking activity in North America’s aerospace and defense (A&D) industry.

According to Mergermarket data, the sector has seen 132 deals totaling USD 21.1bn inked in the year to date (28 November). This looks set to match last year’s record 144 transactions worth USD 28bn.

Among the headline-makers so far this year is spacecraft manufacturer Ball Aerospace’s USD 5.5bn sale to BAE Systems, announced in August. This comes after L3Harris Technologies [NYSE:LHX] swooped for propulsion systems maker Aerojet Rocketdyne in a USD 4.7bn takeover, first announced last December and completed in July. Earlier this week, L3Harris sold its Commercial Aviation Solutions (CAS) business to The Jordan Company (TJC) for USD 800m. Other potential deals are in the pipeline as interest continues to rocket.

Sky is the limit

The backlog of new commercial aircraft now globally surpasses pre-COVID levels and continues to grow, providing nearly a decade of production visibility, says Jon Nemo, senior partner at AE Industrial Partners(AEI). He added that global flight traffic is also expected to exceed pre-pandemic levels in 2024. These fundamentals provide a unique entry point for investment in the commercial aerospace sector, building momentum for M&A, he says. Companies with significant proprietary products and exposure to the aftermarket will attract the highest valuations and interest, according to Nemo.

Meanwhile, original equipment manufacturer (OEM) giants such as Boeing [NYSE:BA], Airbus [EPA:AIR], and General Electric [NYSE:GE] are “focused on stabilizing their supply chains to support this substantial production ramp”, which will likely result in further strategic consolidation, says Nemo.

On the smaller, more vulnerable end, “important but under-the-radar tier-3 and tier-4 manufacturers of commodity parts for Boeing and other large players are shutting down in large numbers,“ says Paul Weisbrich, managing director at D.A. Davidson. “Historically, these small companies making mission-critical parts have been the backbone of A&D. Today, sub-scale companies are not seen as valuable anymore by Boeing nor tier-1 suppliers.”

Space race

Some smaller private companies could become attractive targets for larger defense players looking to gain a competitive edge via access to contracts, say a number of sector advisors.

One such prospective target is X-Bow Systems, a space technology company that recently won a USD 64m contract to provide large, solid rocket motors to the US Navy and the US Army. Earlier this month, X-Bow secured funding in a round led by Lockheed Martin’s venture arm.

Besides propulsion systems manufacturers, businesses providing critical space capabilities such as space launch, small satellites, and components will be logical targets for both strategic and private-equity acquirers, says Nemo.

In addition to AEI, Blackstone [NYSE:BX], Advent International, TJC, KKR [NYSE:KKR], and Veritas Capital have been actively investing in the space sector, a trend that Nemo sees continuing as the market grows, particularly within the government sector. A&D players such as GE Aerospace and General Dynamics [NYSE:GD], which are less exposed to the space sector, may also be looking more actively at space opportunities, he adds.

Meanwhile, in the thriving aerospace segment known as intelligence, surveillance, and reconnaissance (ISR), MAG Aerospace is seen as a potential acquisition candidate given its backer, New Mountain Capital, has owned it since 2018, say the advisors.

Several aerospace companies are currently involved in sale processes, according to reports by this news service. They include American Pacific (AMPAC), a maker of specialty chemicals for rocket motors, and United Launch Alliance, a space-launch joint venture between Lockheed Martin [NYSE:LMT] and Boeing.

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