Aerospace & Defense Industry Report – Second Half 2025
Defense Budget Stability Drives Renewed Deal Momentum
After a cautious start to the year, deal activity accelerated in the second half of 2025 as buyers gained confidence in medium-term federal spending visibility. The FY2025 U.S. defense budget of approximately $895 billion received strong bipartisan support, signaling a stable, multi-year funding environment largely insulated from short-term political dynamics. This structural commitment to defense spending—reinforced by allied investment across NATO countries—provided acquirers with greater certainty that demand would remain durable.
By the third quarter, defense and government M&A activity increased roughly 30% year over year, reflecting renewed buyer confidence. Despite ongoing political headlines, funding flows within the Department of Defense remained resilient across core mission areas including cybersecurity, logistics, engineering services, and mission-critical IT. Public market performance reinforced this view, with defense-focused indices outperforming the broader market over the past year. For investors and acquirers alike, the data continues to support a clear conclusion: defense spending growth is structural rather than cyclical, anchoring M&A activity in what is increasingly viewed as a sustained, long-term expansion cycle.
Regulatory & Compliance Readiness Became a Key Value Driver
Regulatory complexity remained a headwind in 2025, but it also became a key differentiator between premium and average GovCon assets. Buyers placed increased emphasis on companies with strong compliance infrastructure and truly “audit-ready” operations. In an environment of heightened government oversight, Defense Contract Audit Agency-compliant business systems and demonstrated audit readiness shifted from best practice to baseline expectation.
Federal auditors applied greater scrutiny to accounting, timekeeping, and estimating systems throughout the year, reinforcing the importance of disciplined back-office operations. Acquirers consistently rewarded contractors that could demonstrate mature, scalable systems and a track record of successful audits, including clean incurred cost audits and maintained CMMC 2.0 cyber compliance. Firms supporting highly regulated defense programs commanded valuation premiums when they showed proactive compliance and minimal risk of contract disruption. The takeaway for contractors was straightforward: audit readiness is no longer defensive. In 2025, a strong compliance regime emerged as a strategic asset that enhanced buyer confidence and materially improved transaction outcomes.
Continued Consolidation in IT, Cyber, and Mission Services
The back half of 2025 reinforced a clear theme in government contracting: consolidation continues where mission demand is strongest. Cybersecurity, cloud and data analytics, engineering, intelligence support, and logistics remained the most active sub-sectors, with both strategic acquirers and private equity-backed platforms executing disciplined “platform plus tuck-in” strategies to build scale and capability. Heightened focus on zero-trust security, IT modernization, and advanced analytics in support of defense and intelligence missions continues to drive buyer interest.
In practice, acquirers are prioritizing targets that expand access to contract vehicles, deepen agency relationships, or add scarce, cleared technical talent. We saw sustained interest in niche AI, automation, and specialized cyber providers as buyers look to secure long-term contracts and improve margins through scale. The result is a market that remains fragmented but is consolidating quickly in key mission-critical domains, as larger platforms race to assemble broader, more integrated solutions for federal customers.
Quality Earnings and Contract Durability Took Center Stage
By late 2025, buyers across the A&D and GovCon landscape became more disciplined in how they evaluated opportunities, shifting focus from headline growth to the quality and durability of earnings. Earlier interest rate pressure and ongoing uncertainty around procurement timing reinforced a preference for businesses with predictable margins, consistent cash flow, and contract portfolios anchored by long-term task orders and enduring programs. Acquirers were less willing to underwrite growth alone and instead prioritized stability, visibility, and resilience.
Diligence efforts reflected this shift. Buyers scrutinized contract portfolios for recompete risk, funding reliability, customer concentration, and past performance ratings, placing a premium on companies supporting mission-critical programs aligned with current administration priorities. As many top-tier GovCon assets had already transacted in prior years, attention turned to the next tier of companies offering differentiated capabilities and defensible positions. In this environment, weaknesses in customer relationships or contract integrity quickly raised red flags, while contractors demonstrating strong recompete success, high win rates, and multi-year funded contracts continued to command premium valuations. Ultimately, late-2025 M&A activity reinforced a clear message: sustainable, high-quality earnings matter more than short-term growth.
M&A & Investment Landscape
- H2 reflects solid M&A activity in A&D, with deal volume slightly lower than H1 and significant strategic and PE interest in aerospace parts manufacturing, electronics, and Physical AI.
- 2025 A&D deal volume rose by 33.5% over 2024, which reveals the impact of lowering interest rates along with greater funding and budget certainty from the DOW and Congress.
Market & Investment Trends
Rising geopolitical tensions and security threats are spurring a new expansion of spending. European defense budgets are set to grow 6.8% annually from 2024 to 2035, outpacing the US (1.7%), Russia (3.2%), and China (3.1%). Europe’s share of global defense spending is projected to increase from 16% to 22% by 2030, stabilizing through 2035. This is spurring significant rise in public investor movement into the Defense sector, with analysts of the Top 10 public Aerospace & Defense firms forecasting 12% annual earnings growth over the next five years.
Defense Tech had a huge increase in investor activity in 2025. The value of venture capital deals in defense technology jumped to a record $49.1 billion in 2025 from $27.2 billion in 2024. Equity funding for defense technology startups more than doubled to $17.9 billion in 2025 from $7.3 billion in 2024. Drones and autonomous systems, powered by artificial intelligence, are driving a massive investor play in Physical AI.
Mr. Calogero has deep experience in Supply Chain and Manufacturing Industries. Prior to FOCUS, he was the Vice President of Operations for McElroy Manufacturing, Inc., an OEM with revenues of $100M and 250 people. Under his leadership, he leveraged Lean Manufacturing and Advanced Manufacturing technologies to transform the operations of the company. He drove an increase of Gross Margin by 700 basis points, while improving On-Time Performance from 62% to 92%, reduced turnover by 60%, with world-class safety and quality.
As the COO of Coastal Sunbelt Produce, he was responsible for operations, supply chain management, street sales, and asset velocity for this Private Equity backed $300M, 500-person Food Manufacturing and Distribution firm, delivering a 100-basis point increase to EBITDA in the first year. He has also worked in the Aerospace sector, launching his career at Lockheed Martin and Boeing in Finance and oversaw $3B in helicopter and weapons systems contracts. He also led a consulting business in Michigan that transformed product development for Ford, General Motors, and several Tier 1 & 2 Automotive suppliers.
He also worked extensively in Management Consulting and Government Information Technology. He helped transform over 200 companies in Manufacturing, Distribution, Hospitality, Technology, Semiconductor, Life Sciences, and Hospitals/Healthcare. He founded a management consultancy, XSell Solutions, improving performance in Sales, Supply Chain, and Production. He also served as the President of Tefen USA. For this 100 person Global Management Strategy and Operations Consulting firm, he directed all activities within North America and the Far East. Customers included Schneider Electric, Massachusetts General Hospital, Baxter Healthcare, Abbott Laboratories, Applied Materials, Amgen, and Pfizer.
His career in Government IT included Senior VP of Sales and Strategy at Robbins-Gioia, a 600-person program management and business process outsourcing firm, with clients across the DOD and Federal Civilian Agencies. He also served as the Business Manager for Computer Sciences Corporation, leading systems integration programs for the Department of Interior and Department of Commerce.
With an MBA from The George Washington University and a BA from Loyola University Maryland, he is an accomplished presenter, including keynote presentations in Healthcare and National Manufacturing Week conferences, to name a few. Mr. Calogero is a Member of the Young Presidents’ Organization Gold Washington DC/Baltimore Chapter and past Chairman of the YPO DC/Baltimore Chapter.
Mr. Calogero holds FINRA Series 63 and Series 82 licenses.
