What drove a recent wave of arms industry consolidation?

Consolidation within the arms industry has historically been influenced by a combination of three factors: shrinking demand, lack of competitiveness and the political will of governments. For example, in 1993, at a dinner at the Pentagon dubbed ‘the Last Supper’, the biggest arms producers in the United States were told to radically speed up consolidation and restructuring in the face of deep cuts to the US military budget. The spate of mergers and acquisitions this sparked was ultimately halted by another political move, when the US government prevented Lockheed Martin from merging with Northrop Grumman in 1997, fearing it would stifle competition.

The most recent wave of arms industry consolidation in the European and North American arms industries occurred under circumstances different from those at the end of the cold war. Between the height of the Covid-19 pandemic in 2020 and the start of Russia’s full-scale invasion of Ukraine in February 2022, the annual numbers of European and North American companies in the SIPRI Top 100 Arms-producing and Military Services Companies that carried out mergers and acquisitions were significantly higher than at any time since 2014 (see figure 1). In the peak year of 2021, the number was double what it had been just two years earlier. By 2023, the annual number of deals was back to the level seen in the first half of the decade.

This backgrounder investigates the circumstances behind this wave of consolidation. To do this, it uses data on mergers and acquisitions among European (excluding Russia) and North American companies appearing in the SIPRI Top 100 in the 10-year period 2014–23. 

The role of (rising) demand

While shrinking demand for arms and military services is traditionally a driver of consolidation, demand has in fact been rising in Europe and North America since at least Russia’s illegal annexation of Crimea in 2014. The worsened security environment prompted increases in military expenditure, including the shares dedicated to research and development and to procurement. These increases continued even through the economic turmoil of the pandemic and its aftermath. 

The rise in demand accelerated even further in Europe and North America after the full-scale invasion of Ukraine. Partly this was to supply Ukraine, which continues to rely heavily on Western partners for ammunition, ground systems, missiles and air-defence systems as well as other materiel, in the form of military aid or procurement by Ukraine. This led to a slew of new orders, as states either ordered new materiel to give directly to Ukraine or to replace what they had provided as military aid from their own stockpiles. At the same time, the USA, Canada and many European states responded to increased threat perceptions concerning Russia with investments in rearmament and military modernization.

One way in which expectations of continuing high demand (and strong returns) appear to have driven consolidation in the arms industry is by encouraging private equity firms to conduct mergers and acquisitions. These firms usually operate by acquiring companies (or parts of companies) with the aim of increasing the companies’ value, before selling them on for a profit. On the US market, two notable private equity acquisitions during the recent consolidation wave were Veritas Capital’s acquisition of Northrop Grumman’s information technology (IT) services division in 2021 for $3.4 billion, for integration into Veritas’s portfolio company Peraton, and the Carlyle Group’s acquisition in 2022 of ManTech, a provider of IT solutions for the arms industry, for $4.2 billion. Both were all-cash deals, indicating high confidence in expected future returns.

Thus, the recent wave of consolidation came at a time of rising demand and long-term commitments to rearmament and increased military spending across much of the NATO alliance, and to some degree was a response to those conditions. 

Striving for competitiveness in specific sectors

States in Europe and North America are seeking to modernize their militaries, creating demand for advanced weapon systems. Tech companies—often small- and medium-sized enterprises—are increasingly active in the military sphere, and traditional arms producers have shown interest in acquiring firms with expertise and capabilities in cutting-edge technologies that can be incorporated into military hardware. This has helped some established players in the arms industry to expand their portfolios and become more competitive in sectors like uncrewed aerial vehicles (UAVs), electronic warfare and cyber. 

The war in Ukraine has underlined the strategic importance of UAVs for intelligence, surveillance and reconnaissance, and as loitering munitions. An estimated 100 different types of UAV are currently in use in the war—the most advanced, diverse and intensive usage of UAVs in warfare to date. 

The UAV export market is heavily dominated by Chinese and Turkish producers. European and North American arms companies have tried to catch up, including through mergers and acquisitions. Between 2021 and 2022, around 7.6 per cent (8 in total) of all mergers and acquisitions conducted by European and North American SIPRI Top 100 companies targeted companies linked to UAV production capacity. Among notable examples, in 2021 Germany’s Rheinmetall acquired EMT Ingenieurgesellschaft, which produces mainly small airborne reconnaissance UAVs for close-area imaging. In 2022 US company Textron acquired the Slovenian company Pipistrel, which specializes in electric aviation and also develops surveillance UAVs. 

Electronic warfare has emerged as a cornerstone capability in modern military strategy, being responsible for 7.6 per cent (8) of all Top 100 arms industry mergers and acquisitions in 2021–22. With modern warfare increasingly leveraging digital communication and sensor networks, arms companies have been active in acquiring firms specialized in electronic warfare technologies to enhance their capabilities. One example was the 2022 merger of Leonardo DRS—a US subsidiary of the Italian company Leonardo—with the Israeli firm RADA Electronic Industries. The deal fostered the creation of a company ‘aligned to fast growing segments of the US Department of Defense budget [. . .] in advanced sensing’, filling Leonardo’s ‘strategic gap’ in the tactical radar sector. A sign of shifting priorities, the merger followed Leonardo’s sale of its satellite communications segment to Luxembourg-based SES for $450 million. In the same year, Leonardo acquired 25 per cent of German company Hensoldt. Hensoldt is involved in the field of sensors and the acquisition is characterized as helping Leonardo to advance its objective of securing a role in the European defence electronics market. 

Cyber capabilities—including in the areas of artificial intelligence (AI) and cybersecurity—were involved in 20 per cent (21) of all Top 100 arms industry mergers and acquisitions carried out in 2021–22. This shows the great importance the European and North American arms industries place on being frontrunners in the cyber sector, especially AI. One of the most important deals came in 2021, when Peraton acquired US IT services provider Perspecta. Together with the acquisition of Northrop Grumman’s IT services division, this significantly enhanced Peraton’s cybersecurity portfolio, integrating AI-driven analytics and big data solutions. Other prominent examples in the US market included the acquisition of the small firm Koverse, which specializes in AI, by Science Applications International Corporation (SAIC) in 2021, and Amentum’s acquisition of Pacific Architects and Engineers (PAE) in 2022.

Thus, while a lack of competitiveness in traditional military products does not seem to have been a significant factor, the latest wave of arms industry consolidation in Europe and North America was driven in part by companies seeking competitiveness in advanced technologies that play a growing role in modern warfare.

Governments tip the scale

Political will is the third main factor that has historically influenced consolidation dynamics in the arms industry. Governments, as the sole buyers for most of the arms industry’s output, have an interest in keeping their domestic industries competitive but avoiding monopolistic practices. Therefore, governments demand that mergers and acquisitions that could affect competition in sensitive sectors are approved by state regulatory bodies before they can go ahead. 

In response to the most recent wave of arms industry consolidation, governments and regulatory bodies have shown increasing caution, with some deals being delayed or blocked. For instance, Lockheed Martin abandoned an attempt to acquire Aerojet Rocketdyne in 2022 for $4.4 billion after the US Federal Trade Commission filed a lawsuit to prevent it. The acquisition would have allowed Lockheed Martin to vertically integrate the USA’s last independent maker of missile propulsion systems, which could ultimately have led to anticompetitive behaviour. US company L3Harris Technologies was allowed to acquire Aerojet Rocketdyne in 2023, but as L3Harris is not a major direct competitor to the primary customers of Aerojet’s propulsion systems, the acquisition did not raise the same concerns. Instead, it was characterized as a way to strengthen the defence industrial base and maintain competition among missile system primes, rather than consolidating power.

Vetting mechanisms are also being used in European states. For instance, in Italy, the government retains a so-called golden power, a mechanism allowing the state to veto the acquisition of what are considered strategic assets. Fearing issues with Eurofighter supplies, in November 2023 the Italian government prevented French company Safran from acquiring Microtecnica, the flight control systems business of US company Collins Aerospace (part of RTX) for $1.8 billion. The deal was later approved in 2024. In 2020 the Spanish government introduced a process to vet the foreign acquisition of stakes larger than 10 per cent in companies considered to be strategic. The mechanism was triggered in 2023, when Rheinmetall completed its most significant acquisition to date, paying $1.1 billion to acquire Spanish ammunition manufacturer Expal Systems—one of the biggest ammunition producers in Europe. French company Aubert & Duval—involved in the manufacturing of special metal alloys employed in combat aircraft and submarine parts—had been recording losses since 2019 before being affected by the pandemic. In April 2023, to maintain control over a strategic supply chain, the French government allowed for the acquisition of Aubert & Duval by a consortium comprising trans-European company Airbus and French company Safran. The government, the second biggest shareholder of the previous owner of Aubert & Duval, maintained veto power on company decisions to safeguard French strategic interests.

An enabling factor: low interest rates

One additional element explains the wave of mergers and acquisitions in 2021–22. In response to the looming economic crisis brought on by the pandemic, many central banks slashed interest rates from the middle of 2020, only starting to raise them in 2022 (see figure 1). 

This has encouraged some of the consolidation in the European and North American arms industries, as mergers and acquisitions involve large-scale financial resources. Besides the purchase price—which is based on valuations that are especially high compared with company revenues due to the high growth potential in the tech sector—transaction fees and integration and financing costs also occur. Because loans are the dominant source of finance for mergers and acquisitions—either in combination with debt as mixed financing or by themselves—lower interest rates make them cheaper and more appealing to the buyer.

The seller also benefits from lower interest rates, as with financing easier to obtain, deals can happen faster. For instance, L3Harris Technologies sold six business divisions in 2021 for a total of $1.8 billion. The largest sale was of the military training division to the Canadian firm CAE for $1.1 billion. L3Harris used this income, together with debt, for two acquisitions completed in 2023: of US company Viasat’s Tactical Data Links for $2.0 billion and of Aerojet Rocketdyne for $4.7 billion. L3Harris characterized those deals as investments to expand its portfolio.  

While in 2017–23 mergers and acquisitions rose across the general economy in Europe and North America, the increase in the arms industry was even sharper. Between 2020 and 2021, mergers and acquisitions increased by 45 per cent in the arms industry, compared with 30 per cent in the general economy.

Conclusion

In the aftermath of the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine in February 2022, the arms industry in Europe and North America struggled with supply chain disruptions and had difficulty ramping up production to meet the intensified demand. At the same time, the rise of new actors and the maturity of new capabilities underscored the lack of competitiveness of more established European and North American arms companies in sectors like UAVs, electronic warfare and cyber. During 2021–22, mergers and acquisitions were mostly used to address this lack of competitiveness or to expand production lines in response to demand. For example, the price Rheinmetall paid for Expal was three times Expal’s revenues at the time, a high valuation explained by Rheinmetall’s claims that the deal allowed it to triple its ammunition production capacity to meet the rising demand—particularly for 155-millimetre artillery shells—from Ukraine and NATO members.

While the wave of major mergers and acquisitions in the European and North American arms industries seems to have receded, these arms industries are likely to continue to focus on deals to enhance competitiveness in cutting-edge technologies. With military expenditures increasing around the world, and large-scale military modernization and procurement programmes set in motion, governments are likely to be the biggest factor in regulating the pace of consolidation in the arms industry, as they try to strike a balance between fostering a competitive arms industry that can meet the needs of modern warfare, while avoiding over-dependence on a handful of domestic producers. 

In June 2025 the European Commission published a raft of proposals aimed at improving Europe’s ‘defence readiness’. Among the measures were some intended to simplify mergers and acquisitions for arms companies, with contribution to defence readiness an important factor when evaluating deals. Furthermore, as interest rates in both Canada and Europe are starting to fall again—while US President Donald J. Trump has made no secret of his wish to see them cut in the USA too—it appears the stage is being set for a potential new wave of mergers and acquisitions within the arms industry.