Shifts in the US’s approach to defense alliances and the ongoing Ukraine war have seen European countries boost defense budgets, laying the foundations for a defense M&A boost in the coming years.

Across Europe, countries are increasingly concerned about the risk of Ukraine war escalating and cooling US commitment to keeping Europe under defensive umbrella.

This is changing attitudes to investment in defense as European investors who have avoided the sector on ESG grounds reassess their ESG screens in recognition of the need for European economies to ramp up defense infrastructure in a more uncertain and complex world.

European defense stocks have responded to the changing geopolitical setting accordingly, with the STOXX Europe Total Market Aerospace & Defense Index showing gains of more than 65% in 2025. The order books of Europe’s eight largest defense companies increased by 15% in 2024, with their combined free cash flows climbing to a record high of more than €8 billion, according to Fitch Ratings.

Financial institutions across the continent, meanwhile, are also upping their defense industry allocations. The European Investment Bank (EIB) has tripled the scale of an intermediated loan and financing guarantee scheme for defense industry suppliers from €1 billion to €3 billion while some of Europe’s largest banks have signalled their willingness to support the industry, calling on governments to identify high priority projects that require funding.

Firm foundation for defense dealmaking

Rising equity valuations for defense stocks, supportive government policy, and firm funding commitments from banks and institutions have laid a firm foundation for M&A dealmakers to take a more active role in the sector.

The tailwinds behind dealmaking in the sector are already showing in deal figures, with analysis of Refinitiv data by law firm A&O Shearman reporting $2.3 billion of European defense M&A deal value through the first half of 2025, a 35% year-on-year increase.

Big ticket military-industrial deals led by strategic buyers have been a big driver of the increase in M&A value, with high profile transactions during the last 12 months including German defense company Rheinmetall’s $950 million acquisition of Loc Performance Products, a US manufacturer of military vehicle componentry, and the €365 million acquisition of LMB, a French-based developer of fans and motors used in military contexts, by US defense component maker Loar Holdings.

Private equity firms are also stepping into the frame, with PEI reporting that a number of managers, including Tikehau Capital, BOKA and Marondo, are launching new defense-focused private equity and venture capital funds.

Different defense capabilities

M&A is also serving as a vital channel for allocating capital into rapidly evolving AI- and technology-powered technologies that are reshaping battlefield tactics and defense strategies.

Drone warfare, cyberattacks, and space are among the novel military areas where trade and private equity dealmakers have deployed capital.

French jet engine maker Safran, for example, has acquired Preligens, a developer for software and algorithms that are used to identify objects of military interest using satellite images, for €220 million, while German-based Helsing, which builds AI-powered defense software, raised €600 million in a recent Series D funding round.

Drone capability has been a particularly busy area, with Tekever, a producer of AI-powered drones, securing unicorn status after a recent funding round, and Rheinmetall partnering with US drone company Anduril to develop aerial powered attack drones and missile rocket motors.

Looking ahead

Investing in defense is not without its challenges. Investment horizons can be long, running to 15 years or more, and projects capital intensive. On the regulatory side national security clearances and anti-trust considerations add further layers of complexity.

What is clear is that M&A will serve as a critical channel for funnelling much required capital into Europe’s defense and security capabilities. Even though the acceleration of defense spending in Europe is still relatively recent, dealmakers are already showing their commitment to playing their part.