Aerospace & Government | Q2 2025 | PCE Investment Bankers

Executive Summary

Valuation appetite rebounded in Q2 2025 as TEV/EBITDA expanded to 16.4× and TEV/Revenue to 3.25×, even though deal flow slipped to 119 LTM transactions. Buyers continued to chase mission-critical ISR, C5ISR, and space-focused suppliers, highlighted by AeroVironment’s $4.1 billion acquisition of BlueHalo. Commercial air-travel demand and OEM production ramps sustained the civil side, while long-cycle defense programs provided ballast against Federal-budget uncertainty.

Critically, the “Big Beautiful Bill” marked a historic fiscal inflection point—authorizing an additional $150–$157 billion in funding and pushing the U.S. defense budget above $1 trillion for the first time. Major allocations included $29 billion for shipbuilding, $25 billion for munitions, and $25 billion for the “Golden Dome” missile defense system. This legislative tailwind fueled optimism around next-gen aerospace platforms, nuclear modernization, hypersonic R&D, and classified space programs.

Still, DOGE procurement reforms and the specter of Chinese rare-earth export limits elevated execution risk and input-cost volatility, pressuring mid-tier contractors reliant on niche components and tightening liquidity timelines.^{1 2 3}

Market Dynamics

The ADG sector recorded 119 closed transactions LTM (27 in Q2 alone), compared to 124 in Q1. Median TEV/EBITDA rose to 16.4× and TEV/Revenue to 3.25×, reflecting heightened competition for scarce, IP-rich assets. Strategic acquirers prioritized vertical integration and AI-enabled platforms, while PE sponsors gravitated toward bolt-ons with entrenched DoD contracts. DOGE-driven compliance burdens and rare-earth supply fears reshaped diligence checklists, but robust backlogs and AAM momentum kept pricing firm^{2 4 1}

Buyer Landscape

Strategic Acquirers: Strategics dominated 100 of 119 deals (84.0%), and 3 backed by private-equity owners (~2.5%). Activity centered on EW, autonomy, and space-hardware specialists offering sticky, program-of-record revenue.

Financial Buyers: Pure-play PE and family-office buyers closed 16 deals (13.5%) and financed an additional three “strategic-backed” platform add-ons, targeting precision machining, avionics MRO, and cyber-mission engineering businesses that can scale via follow-on acquisitions.²

Industry Comparison

Despite a 4% YoY drop in transaction count, ADG valuations outpaced the broader industrials complex, buoyed by scarce defense-electronics assets and commercial aero recovery. The sector’s median 16× EBITDA multiple eclipsed the S&P 500 industrials average (~12×) and reflected investors’ confidence in decades-long defense funding and aftermarket revenue streams. Budget ambiguity and supply-chain tension temper enthusiasm but have not yet depressed pricing.^{3 4 1}

Geographic Expansion

Top U.S. States: California (20), Florida (13), and Virginia (8) again led deal counts, benefiting from dense aerospace clusters, DoD bases, and venture-backed innovation corridors.

Cross-Border Trends: International acquirers accounted for ~25% of Q2 volume, with Indian, Israeli, and UK buyers pursuing U.S. ISR and propulsion assets to secure NATO-compliant technologies.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. Record Defense Spending Increase
   The Big Beautiful Bill authorizes an additional $150–$157 billion in defense funding for FY2025, pushing the annual defense budget above $1 trillion for the first time.^{11 12 14}
2. Major Allocations Include:
   $29 billion for shipbuilding, $25 billion for munitions, $25 billion for the "Golden Dome" missile defense system. Substantial increases for research, development, and procurement of next-generation aircraft, hypersonic weapons, and military space assets.^{11 12 13 14}
3. Aerospace Sector
   The "Big Beautiful Bill" provides a massive boost to aerospace operations: The Air Force receives $4.5 billion for B-21 bomber production and $2.5 billion for Sentinel ICBM development, supporting nuclear modernization and next-gen long-range strike. The Space Force gets a 40% budget increase, including $11+ billion for satellite defense, space-based sensors, and the Golden Dome missile shield. Additional funding enhances classified space superiority programs and expands missions for the X-37B spaceplane.^{13 14}
4. Space-Enabled ISR & SDA
   LEO constellation build-outs and Space Force priorities are accelerating interest in software-defined payloads and resilient comms links.^{1 5}
5. Advanced Air Mobility (AAM)
   eVTOL OEMs secured >$600 million in Q2 financing, driving M&A for battery-management IP and light-weight composites.^{4 3}
6. Supply-Chain Sovereignty
   OEM backlogs and Chinese rare-earth threats pushed primes to on-shore magnetics, titanium, and PCB lines, spurring acquisitions of domestic specialty manufacturers.^{2 6}
7. AI-Enabled Sustainment
   Predictive-maintenance algorithms and digital twins became priority tuck-ins as 83% of executives budgeted for AI/ML deployments in 2025.¹
8. Portfolio Realignment
   Primes carved out non-core units (e.g., Honeywell/Cobham deal) to fund R&D in hypersonics and counter-UAS tech, boosting carve-out deal flow.
9. DOGE Compliance Drag
   New audit clauses added 3-to-6-month delays on certain service-contract awards, pressuring liquidity at mid-tier GovCon vendors.^{8 9}

Outlook for Next Quarter

Opportunities: FAA certification milestones for eVTOL prototypes and record-high airline traffic should lift commercial aero M&A, while DoD’s FY-25 budget requests signal continued demand for AI-powered C5ISR and hypersonic interceptors.^{1 7}

Risks: Labor shortages, titanium-sponge scarcity, and prolonged DOGE rule-making could extend integration timelines and squeeze margins; any escalation in U.S.–China trade frictions would amplify cost inflation for avionics and EW subsystems.^{3 6}

Predicted Activity: Expect cross-border bolt-ons in precision tooling, ISR payloads, and space electronics, with NATO-aligned buyers paying premiums for ITAR-cleared IP; sponsor-backed strategics will accelerate roll-ups to capture synergies ahead of 2026 rate-cycle uncertainty.^{2 4}

PCE Transactions

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