Aerospace & Defense Industry Trends Shaping M&A Activity

The aerospace and defense (A&D) sector is entering what many industry experts believe to be the early stages of a new growth cycle. Strong demand fundamentals, rising geopolitical tensions, and supply chain constraints are driving sustained investment and creating opportunities for mergers and acquisitions across the industry.

According to Megan Welch, managing director of Aerospace, Defense and Government Services at Brown Gibbons Lang & Company (BGL), both aerospace and defense markets are positioned for continued growth.

“I believe that both aerospace and defense are in the early innings of a cycle boom,” Welch said during a recent M&A Mastermind podcast interview.

Supply chain constraints create opportunities across the aerospace and defense sector

One of the most significant aerospace and defense industry trends shaping the market today is supply chain disruption. Precision manufacturing and component production have become key bottlenecks across the aerospace and defense supply chain, creating opportunities for both strategic acquirers and financial sponsors.

“Precision manufacturing and component manufacturing are becoming the single point of failure across the board for the subsectors,” Welch said. “It’s created a really great dynamic, especially for smaller, founder-owned businesses that operate in fragmented markets.”

Many of these businesses are smaller suppliers with less than $10 million in EBITDA that serve specialized programs or niche applications. Their fragmentation presents opportunities for private equity firms pursuing roll-up strategies as well as strategic buyers seeking to secure supply chain capacity and ensure production continuity.

Aerospace demand rebounds as airlines face record aircraft backlogs

Another major trend impacting the industry is the continued recovery of commercial aerospace following the disruption caused by the COVID-19 pandemic. Airlines parked aircraft during the pandemic, while production challenges at major manufacturers created delays throughout the supply chain.

As a result, the industry is now facing record aircraft backlogs.

“There is a 13-plus year backlog in the supply chain for commercial aerospace,” said Welch. “Airlines are flying aircrafts much longer than they expected, which is driving significant demand for maintenance, repair and overhaul services (MRO).”

Learn more about BGL’s recent transaction in the MRO sector here.

Business aviation has also experienced renewed momentum. During the pandemic, more travelers turned to private aviation, and fractional ownership models helped make private travel more accessible to a broader group of consumers.

Defense spending and geopolitical instability drive industry growth

The defense sector continues to benefit from rising global defense spending and geopolitical instability. These dynamics are increasing the need for investment across the defense industrial base and creating strong tailwinds for companies that support military programs and platforms.

“All facets of defense are firing on all cylinders,” Welch said, pointing to sustained government investment and the growing need to strengthen domestic defense manufacturing capabilities.

Buyers are increasingly prioritizing companies that provide access to critical defense programs, production capacity or specialized technologies. Rather than pursuing acquisitions simply to gain scale, investors are focusing on strategic assets that align with long-term defense priorities and government funding programs.

Technology and defense innovation remain key investment themes

Technology is also playing an increasingly important role in aerospace and defense investment. Venture capital has flowed into defense startups developing advanced technologies, though many companies must overcome what is often referred to as the “valley of death” — the gap between early-stage prototyping and full-scale production. Programs of record provide certainty of funding and long-term valuation. Short-term research & development are valuable, but buyers prefer companies with long-term programs.

Real value is often created once a technology becomes part of a long-term government program.

“Programs of record are huge from a valuation perspective because they provide certainty of funding for five to 10 years,” Welch said. “Even low-rate production contracts or small business contracts provide value, but buyers often discount these until longer-term contracts are secured.”

What aerospace and defense business owners should consider before selling

For aerospace and defense business owners considering a sale, preparation remains critical to achieving a successful transaction.

Welch recommends conducting a quality of earnings review and ensuring strong visibility into backlog, contracts and future pipeline before launching a sale process. These steps help buyers gain confidence in the durability of a company’s revenue and growth prospects

Outlook for aerospace and defense industry trends

Looking ahead, the combination of sustained defense spending, commercial aerospace recovery and continued supply chain constraints is expected to support strong investment activity across the sector.

Welch believes these dynamics will continue driving elevated valuations and deal activity for years to come. As a result, aerospace and defense companies — particularly those operating in critical supply chain segments — are likely to remain attractive targets for strategic buyers and private equity investors seeking long-term growth opportunities.

Contact our Aerospace, Defense & Government Services (ADGS) investment banking team

BGL’s Aerospace, Defense & Government Services (ADGS) investment banking team has decades of relevant experience and a network of long-standing relationships across a broad range of subsectors, including aerospace technology, aviation services & distribution, defense, space, and government technology & services.