Air, Land, Sea, & Space Systems Market Update – June 2023

Elevated Defense Spending and Nuclear Modernization Efforts Support M&A in Air, Land, Sea, & Space Systems Market

Capstone Partners released its June 2023 Air, Land, Sea, & Space Systems Market Update, reporting that healthy merger and acquisition (M&A) activity and strong performance by public companies in the sector have been fortified by recession-resistant defense spending.

The proposed fiscal year (FY) 2024 Department of Defense (DOD) budget is the largest since World War II, creating substantial visibility for near-term defense spending. The U.S.’ pacing threat of China and healthy defense spending have contributed to robust contracting opportunities and key investments to maintain global military competition. The proposed budget of $842 billion is likely to increase between 5% and 10% once it is approved by congress, in line with historical congressional budget cycles. Fears of a recession have had a muted effect on funding in the sector, as government spending on defense has historically been recession proof. U.S. spending on defense has grown substantially during recent recessions, even more so during severe economic periods such as the Great Financial Crisis and the onset of the COVID-19 pandemic. Spending is likely to continue growing through a potential recession.

M&A through year-to-date (YTD) 2023 has marginally outpaced YTD 2022, as transaction volume has normalized to pre-COVID levels following a frenzy of deal activity in 2021. Air Systems has overtaken Space Systems as the most targeted segment through YTD 2023. This reverses a trend in 2022 of buyers prioritizing commercial space investments. Despite a slight downtick in M&A activity through YTD, the Space Systems segment continues to benefit from the growth of the Commercial Space subsegment. Privately led efforts to advanced space systems technology have resulted in buyers targeting companies that serve both government and commercial customers. Financial buyers have largely remained on the sidelines through YTD 2023 as the rising cost of capital has placed additional pressures on firms’ ability to complete large-scale buyouts and has increased scrutiny over target company profitability.

Also included in this report:

• A breakdown of refreshed spending on the U.S. nuclear triad capabilities.
• Public company valuations and detailed insights on the M&A environment.
• Commentary on how non-prime subcontractors have helped drive M&A activity in the sector YTD.