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Aerospace and defense: US Deals 2024 outlook

Mid-size transactions will likely continue to drive M&A in 2024

In 2023, deals in the aerospace and defense (A&D) sector continued to focus on mid-range value transactions in strategic areas, helping both corporate and private equity investors build out capabilities and programs. Dealmaking in 2023 was largely consistent with levels in 2022 with a few notable exceptions regarding space and propulsion systems deals.

A&D sector consolidation over the past decade increased the Department of Defense’s dependence on fewer suppliers for critical equipment, resulting in increased antitrust scrutiny. In addition to this scrutiny, the interest rate environment and the focus on high-growth emerging technologies may drive future M&A in the sector towards smaller transactions.

We expect the large defense prime contractors to pursue smaller assets in key growth areas such as unmanned aircraft, hypersonics, cyber and space. We expect the commercial aerospace sector to outpace overall global economic growth as the sector recovers to pre-pandemic levels. However, continued high fuel costs, supply chain issues, competition for talent and pressure to deliver sustainability initiatives (particularly carbon emission mitigation) are just some of the headwinds that could impact deal levels. 

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Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.​

Key deal drivers

Capital allocation: High interest rates and regulatory scrutiny could limit large deals

Despite a slowdown in debt repayment and increased cash flow, A&D companies are hesitant to pursue large deals due to the interest rate environment and regulatory risks. It appears that the sector’s consolidation of large assets it experienced over the past decade will enter a slow-down phase. We expect, therefore, that the large defense prime contractors will likely rather pursue smaller assets as M&A targets in key growth areas including unmanned aircraft, hypersonic, cyber and space. 

Private equity may play a role in a rebound of M&A activity, given the substantial dry powder ready to be deployed. Financial sponsors may be particularly attracted to a string of smaller add-on transactions to a portfolio business aligned with a government budget focus. We expect multiples to remain strong for high-quality assets with strong cash flow and recurring, contracted revenues.

Commercial aerospace provides opportunity amid uncertainty

We expect the commercial aerospace sector to continue to strive to recover to pre-pandemic levels. However, persistently high fuel costs, supply chain issues, competition for talent, pressure to deliver sustainability initiatives, especially carbon emission mitigation, are some headwinds that could impede growth. Given the focus on carbon emissions — and potential legislation around the use of sustainable fuels impacting both commercial and military end uses — a near-term focus will likely be placed on investments in bridge technologies until electric, hydrogen and other low emission engine technologies can be refined.

Companies will likely manage these challenges through acquisitions and strategic portfolio reviews. Companies are also considering vertical consolidation along the supply chain to both address raw material and component part concerns and improve margins. Additionally, we expect acquisitions to help close current skill gaps and increase R&D capabilities in high innovation areas. 

Geopolitical trends and labor markets will necessitate reinvention

The expected increase in military spending and overall stability of longer-term defense budget forecasts is likely to lead to additional dealmaking. So far, however, we’ve not yet seen a significant impact on M&A from the higher defense spending. We may see a consolidation of Europe’s relatively fragmented defense base, or — at the very least — a focus on increasing interoperability of platforms. However, the potential for strategic consolidation could be limited due to regulation and national security concerns, especially if non-European buyers are involved.

We expect the tight market for high-end labor talent to continue to drive M&A activity. Attracting and retaining labor is still a challenge for A&D companies as they compete with Silicon Valley and the broader tech sector for scarce science, technology, engineering and mathematics resources. We expect A&D companies to continue to look at smaller targets with highly skilled workforces to fill strategic skill gaps.

“We expect companies in the A&D sector to build out capabilities in areas such as space, hypersonic, sustainable fuels and cyber — focusing on emerging technologies as they rationalize their portfolios. 2024 M&A will likely see further strategic focus on strengthening supply chains and acquiring high-end labor talent to support growth.”

— Bob Long, US Aerospace and Defense Deals Leader

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