Aerospace, Defense & Government Q1 2025

Executive Summary

Valuation multiples compressed slightly YoY, although deal flow remained stable, supported by long-cycle defense programs and a rebound in commercial aerospace. While defense technology and aerospace platforms remain active segments, the broader federal contracting outlook has shifted under the Trump administration. Budgetary reforms introduced by the Department of Government Efficiency (DOGE) have created heightened uncertainty for federal contractors, with particular implications for defense aerospace firms.

Meanwhile, the civil aerospace sector has remained more stable, buoyed by increased commercial air travel and OEM production ramp-ups. Growing geopolitical tension has also intensified supply chain risks for the defense sector. Export restrictions by China on critical rare earth minerals would create significant limitations for U.S. defense manufacturers, potentially constraining access to essential inputs and creating chokepoints in production. This vulnerability may drive up input costs and delay production for next-generation defense systems.

Market Dynamics

The Aerospace, Defense & Government Contracting (ADG) sector recorded 124 closed transactions (LTM) in Q1 2025, a modest decline from 127 in Q1 2024 and 126 in Q1 2023. TEV/EBITDA fell to 14.9x, while TEV/Revenue moderated to 2.6x, reflecting a focus on mission-critical capabilities and contract-backed revenues. AI adoption and vertical integration continue to shape M&A strategy, especially among firms seeking scale and resilience. While defense has been largely protected from recent federal cuts, DOGE-driven reforms have introduced regulatory uncertainty and signaled potential shifts in procurement priorities. Additionally, potential export restrictions on rare earth minerals by China pose upstream supply risks that could increase costs and production delays for defense-linked platforms.^{1 2 3}

Buyer Landscape

Strategic Acquirers: Strategic buyers led 103 of 124 tracked deals (83.06%), out of which 19 deals (18.5% were PE-backed strategics, targeting firms with prime defense contracts, advanced aerospace tooling, and AI/ISR capabilities). Notable examples include SPX Technologies’ $342M acquisition of Kranze Technology and TJC LP’s $800M acquisition of Acron Aviation.

Financial Buyers: Private equity firms accounted for 21 deals (16.94%), often backing add-ons in engineering, cyber, and manufacturing segments. PE buyers like Cerberus and Blackstone pursued bolt-ons with unique IP and long-term contract visibility.²

Industry Comparison

ADG M&A activity remains strong, underpinned by record air travel and rapid innovation in aerospace technologies. Despite modest volume contraction, the sector remains highly strategic with stable valuations, particularly for targets with unique IP or program-of-record contracts. While budget headwinds and potential supply chain disruptions may pose risks to the ADG contractors, the sector nonetheless outperformed broader industrials in Q1 valuation performance.^{1 3 4}

Geographic Expansion

Top U.S. States: California (17), Florida (13), and Virginia (8) led deal activity, driven by proximity to major aerospace hubs, DoD installations, and innovation corridors.

Cross-Border Trends: Cross-border transactions rose 27% YoY, as foreign buyers targeted U.S.-based firms offering specialized aerospace and ISR platforms.²

Notable Transactions

Largest Transactions Closed

Other Financial Buyer Transactions Closed

Other Strategic Buyer Transactions Closed

Emerging Trends

Key trends shaping Aerospace, Defense & Government M&A:

1. Advanced Air Mobility & Unmanned Systems
   Unmanned systems, drones, and AAM platforms continue to dominate strategic investment due to military adoption and emerging commercial use cases.^{1 6}
2. Domestic Sourcing & Inventory Strategies
   Production backlogs and material lead times are prompting firms to reevaluate supplier relationships, invest in domestic manufacturing capacity, and build buffer inventory to mitigate future disruptions.^{3 4}
3. AI-Driven Platforms
   81% of executives are investing in AI/ML solutions, accelerating M&A in analytics-based ISR, threat detection, and predictive maintenance.¹
4. Portfolio Reshaping & Strategic Alliances
   Major primes and suppliers are divesting non-core units and forming joint ventures to align with evolving procurement trends.^{5 7}
5. Defense Budget Realignment
   DOGE-driven reforms have increased compliance burdens and contract unpredictability for defense-focused government contractors. While large primes have remained relatively insulated, mid-sized and ESOP-owned contractors have faced stop-work orders, delayed payments, and increased financial strain—particularly those linked to non-core DoD missions and foreign service support.
6. Critical Materials Risk
   ADG manufacturers face potential pressure from China’s threat to restrict rare earth mineral exports. Export restrictions would create significant limitations, potentially constraining access to essential inputs and disrupting production.

Outlook for Next Quarter

Opportunities: Commercial aircraft deliveries are expected to rise by 20%, while DoD procurement in AI, robotics, and laser systems remain robust. M&A is likely to accelerate in the cyber, supply chain, and executive aviation segments.^{1 6 8}

Risks: Labor shortages, production capacity constraints, and geopolitical instability may delay integration timelines and increase operating costs. Budget uncertainty driven by DOGE reforms remains a central risk for defense aerospace contractors. Fitch expects procurement and RDT&E spending to remain relatively stable for now, though future shifts could affect funding visibility and contract timing. Additionally, strategic material shortages tied to Chinese supply constraints may elevate cost structures and risk timelines for defense & aerospace programs.^{3 4 9}

Predicted Activity: Cross-border M&A and bolt-on deals in ISR, precision tooling, and modular platforms are expected to lead activity. Firms with DoD or NATO-linked contracts will likely command premium valuations.^{2 5}

PCE Transactions

 

Served as advisor to Grant Aviation on their sale to Westward Partners

Served as advisor to Hop-A-Jet Worldwide Jet Charter as they became 100% ESOP owned

Served as advisor to Unique Electronics for senior debt refinancing

Served as advisor to Williams Electric Co., Inc. on their sale to Parsons

Served as advisor to Milcom Technologies for a fairness opinion

Served as advisor to Schwartz Electro-Optics, Inc. on their sale of Auto Sense to Osi Laserscan

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