M&A Report
This article is part of Bain's 2025 M&A Report.
A surge in venture capital funding is positioning new entrants to take share from legacy defense companies. Winning incumbents will pursue M&A in a variety of formats to gain the technical and operating model innovations necessary to stay competitive.
Defense has enjoyed a more than tenfold increase in venture investments over the past decade, making it an outlier among industries (see the Bain Brief “Rethinking Defense: The Role of Private Capital”). Multiple factors are propelling this boom, such as the growing gap between defense requirements and budgets, an innovation and affordability imperative, and increasing overlap between commercial and defense technologies. The success of companies such as Palantir and SpaceX is intensifying venture activity. Young companies built on that capital are delivering innovation that is improving capability and reducing cost—and positioning those companies to take share.
Incumbents should employ a number of defensive and offensive moves to hold off disruptive entrants. They must do a better job of delivering on schedule and at lower cost, and they must ensure that they are meeting customer needs while also shaping the requirements of the future. At the same time, they can proactively reposition themselves against competitive threats by purposefully cannibalizing their own products or looking for other ways to creatively disrupt their own markets.
Successful incumbents will pursue acquisitions that add capabilities and talent. Importantly, they will rely on processes that ensure that integration does not stifle innovation or create significant cost structure challenges. Excessive integration within a parent organization could hinder innovative development models, restricting the benefits of unburdened cost structures. The goal will be to focus on what’s unique (e.g., talent, IP, technology, etc.) in order to deliver value.
Rethinking Defense: The Role of Private Capital
The defense sector needs private capital to fuel innovation, expand capacity, and improve affordability.