Is European Aerospace and Defense the Next Hot Sector?
The A&D M&A bonanza in the United States has greatly consolidated the industry. This has attracted the attention of the Department of Defense, which recently announced its intent to provide greater regulatory oversight. As a result, A&D firms and contractors may be looking across borders to find enticing deals. Early evidence suggests that European aerospace and defense mergers and acquisitions may be about to take off.
It’s in some ways a surprising development, as NATO members have long garnered American criticism for failing to meet minimum defense expenditure thresholds. The Ukraine conflict has the potential to change that, and with it, to alter the landscape of European defense spending, and ultimately European A&D M&A. NATO spending, long a political complaint by American elected officials against European diplomats, might finally take off. And with it could come a fundamental shift in A&D M&A, at least over the short-term. If Russian aggression continues, this could even be a longer lasting change.
NATO guidelines require member nations to spend at least 2% of their annual economic output on defense. It’s a threshold just four NATO members have managed to meet: Latvia (2.5%), Greece (2.6%), Romania (2.3%), and Estonia (2.4%). Notably, larger nations with larger budgets have consistently failed to approach this threshold, with the larger European Union expending just 1.2% of its budget. For Germany, one of the wealthiest nations in the EU, the figure is just 1%.
Russia’s stunning invasion of Ukraine has shown that aggression poses a real threat to EU members, and has revived interest in defense spending. Ukraine had once aspired to join the EU and NATO. Now it’s unclear whether it will even continue to exist. While the conflict has decimated much of Ukraine’s economy and inspired widespread European uncertainty, defense may enjoy a sudden boom and a new cold war.
We’re already seeing signs of defense deals doubling, with the U.S. encouraging increased defense spending across Europe in the last few years. 2021 generally saw increases, with 52 deals last year. This figure soared above 2019’s previous high. And with deal value at an estimated 27 billion Euros, 2021 nearly doubled 2019’s high of 11.7 billion Euros. Even before the invasion, there were signs that years of cuts might finally reverse.
Rising public defense spending will undoubtedly feed the private sector. Still, though, it’s an unpredictable industry. National security woes have historically complicated cross-national defense mergers and acquisitions, even between historic allies. However, American buyers are increasingly interested in comparatively less expensive European businesses and the assets they offer.
Ultimately, rising defense spending could become a tool of diplomacy, encouraging bad across to think twice before invasions and threats. For now, though, we should expect increased spending and manufacturing, as well as a potential deal bonanza.
Preparing for A&D M&A requires a thoughtful, well-executed strategy, and plenty of planning, whether you’re on the buy-side or the sell-side. The right advisory team is critical, especially for firms looking to capitalize on this unprecedented and surprising growth.