Fortress Europe – defence sector M&A

Of the defence M&A deals announced in Europe in H1 2025, a sizeable share involved Nordic targets. Specifically, three of the nine H1 deal targets were based in Finland, Sweden and Norway. We expect the Nordics to continue to be particularly active in defence dealmaking  over the coming year. With Finland having joined NATO in 2023, closely followed by Sweden in 2024 (ending more than 200 years of military non-alignment), these countries are committed to increased defence spending driven by heightened security concerns around the ongoing conflict in Ukraine.

Several other countries are also emerging as key players in European defence M&A. Poland has significantly ramped up its defence spending and is actively pursuing industrial partnerships. Germany also stands out with its ambitious rearmament programme and growing role in cross-border acquisitions and joint ventures. The UK, under its Strategic Defence Review and new UK-EU pact, is fostering innovation and cross-border dealmaking, particularly among SMEs. Ukraine, meanwhile, is rapidly  becoming a strategic partner and innovation hub, with  battlefield-driven technologies, growing integration into EU defence frameworks and a surge in domestic and outbound M&A activity.

Top five defence deals, H1 2025

Tensions between Washington and Brussels have intensified Europe’s push for defence autonomy. The largest deal of H1 2025 involved Franco-German defence contractor KNDS exercising its option to acquire an additional 18.4% stake in Bavaria-based tank gearbox manufacturer RENK Group for EUR 413 million. The remaining eight transactions also featured European bidders, underscoring the “buy European” approach championed in the 2024 Draghi report. That report urged a reduction in reliance on non-EU suppliers, highlighting that the majority of EU defence spending still flows to external contractors, particularly in the US.  In response to this shift towards European consolidation and autonomy, US defence contractors keen to remain involved in EU defence projects are actively adapting their strategies to secure a share of the continent’s expanding defence budget.

US companies like Honeywell and Anduril are investing in European subsidiaries and acquiring local firms to establish a credible, long-term presence in the region. Honeywell’s acquisition of Italy’s Civitanavi Systems, for instance, not only brought advanced navigation technology into its portfolio but also provided a manufacturing base within the EU – critical for meeting EU funding requirements around IP control and local production.

US defence firms are also forming joint ventures and subcontracting relationships with European primes and, increasingly, the growing ecosystem of start-ups and SMEs. Lockheed Martin’s collaboration with Poland on the HOMAR-A system and its HIMARS sustainment centre in Romania, as well as its partnership with Rheinmetall to develop the GMARS launcher in Germany, demonstrate this strategic adaptation.

Partnerships are carefully structured to enable US firms to contribute advanced or non-sensitive technologies while ensuring that design authority, production control and access to classified capabilities remain within Europe – an  essential condition for compliance with EU sovereignty protocols and eligibility for certain EU funding mechanisms. Such collaborations are particularly active in AI, autonomous systems and cyber defence, where European initiatives like EDF and PESCO are driving innovation and industrial resilience.

Beyond regulatory compliance, US defence firms are increasingly prioritising co-development and cultural alignment with European partners. Executives stress the importance of “acting like an EU company” – embedding engineering, R&D and manufacturing within Europe to build trust and long-term credibility. This approach is essential for aligning with EU frameworks such as the SAFE Regulation, which mandates that at least 65% of a defence product’s component cost must originate from  entities in the EU, EEA-EFTA states or Ukraine. SAFE also requires local infrastructure, executive management  and design autonomy, making cultural and operational integration a strategic necessity for accessing EU funding.

While direct access to EU defence funding programmes remains limited, US firms can leverage NATO procurement frameworks and bilateral agreements with individual EU member states to maintain market access. Ongoing transatlantic dialogues, such as the US-EU Security and Defence Dialogue, reflect growing interest in establishing a formal EU-US Security and Defence Partnership. If realised, such a framework could eventually pave the way for trusted partner status or tailored exemptions under EU procurement rules.

Looking ahead to 2026, we expect to see a continuation of defence consolidation within Europe, alongside a gradual reduction in direct US participation in EU-funded defence projects. Joint ventures will remain in vogue – primarily among European partners but also involving US firms that meet the necessary compliance and eligibility standards.

Rising defence budgets and Europe’s push for industrial consolidation are creating attractive opportunities for PE investors. PE firms are increasingly active in defence M&A, particularly in building competitive European groups through acquisitions in dual-use or less politically sensitive areas – such as aerospace components, electronics, logistics, and support services – while  investments in core weapon systems and highly sensitive technologies remain limited. However, there is a growing trend toward incorporating security considerations into ESG criteria, driven by heightened geopolitical tensions and the strategic importance of defence investments.

We expect PE interest in defence tech start-ups and scaleups to continue to grow in 2026, especially in AI, unmanned systems and cyber defence. These areas combine agility, commercial viability and fewer procurement constraints, making them attractive to private capital. While Europe still trails the US in overall PE defence investment, momentum is building. Dedicated funds like Tikehau’s Defense et Securite and Weinberg’s Eirene Fund are gaining traction, supported by EU initiatives such as Readiness 2030, which aims to mobilise private capital to strengthen Europe’s defence industrial base.

M&A in Europe’s defence sector is shaped by a uniquely intricate landscape of regulatory, political and operational hurdles. Dealmakers must contend with fragmented export controls, with rules differing not only between EU member states but also in their interpretation and enforcement. These controls can restrict the transfer of sensitive technologies, delay approvals and complicate cross-border integration, particularly in deals involving dual-use assets or classified capabilities.

Relatedly, many European jurisdictions have strengthened their FDI regimes in recent years, allowing governments to block or impose stringent conditions on acquisitions of defence-related assets, especially by non-EU investors. These reviews can significantly extend deal timelines, increase costs and introduce execution risk.

Deals involving classified contracts or sensitive technologies require rigorous safeguards. Buyers may need to establish “clean teams”, secure national security clearances and implement ring-fenced IT systems to protect confidential data and comply with  defence ministry protocols. Cybersecurity risks are also increasingly material, with acquirers needing to assess target vulnerabilities and ensure post-deal resilience. Similarly, in the case of joint ventures or cross-border collaborations, it is critical that design authority and control over critical technology systems remain within compliant jurisdictions to ensure access to EU funding and uphold strategic autonomy.

Despite these hurdles, the defence sector remains attractive for well-prepared investors and acquirers. Success depends on proactive regulatory engagement, robust due diligence and strategic alignment with national and EU defence priorities. In an environment where security imperatives are reshaping industrial policy, M&A can serve as a powerful tool to accelerate innovation, enhance resilience and strengthen Europe’s collective defence capabilities.