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Space Militarization Expands Frontier for C4ISR M&A Market
Capstone’s latest Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) Sector Update reports that merger and acquisition (M&A) deal volume in the C4ISR market in 2025 extended gains seen in 2024. The continuance and emergence of geopolitical conflicts across both hemispheres heightened defensive posturing within the U.S. and among North Atlantic Treaty Organization (NATO) allies, driving a sharp increase in both end market and C4ISR M&A demand. Developments in the Golden Dome initiated an arms race, positioning space as a lucrative extension of the sector’s addressable market and fueling strong demand for C4ISR technologies. Acquisition reform from the Department of War (DOW) heightened competition within the sector, driving renewed adoption of bolt-on strategies to align offerings with DOW strategy.
The U.S. defense budget continued to expand in 2025, with proposals for fiscal year (FY) 2026 approaching the $1 trillion mark, according to the DOW. The White House called for further increase beyond that point to ~$1.5 trillion, aligning U.S. spending levels as a percentage of gross domestic product (GDP) with the goals of key allies including NATO and Taiwan, according to the BBC. The C4ISR sector is situated to receive an outsized portion of these sums amid the importance of software-driven operations within modern combat, incentivizing investment and inorganic growth among market participants in pursuit of additional market share.
The Pentagon fundamentally altered the method through which the military develops, procures, and fields critical weapons, systems, and technologies. The DOW adopted a new streamlined method of acquisition with the rollout of the Warfighting Acquisition System (WAS), aligning best practices with key attributes of the C4ISR sector, including software definition and modularity. Furthermore, aversion to large-scale, sole-sourced development projects in favor of multi-vendor contracting created new avenues for middle market C4ISR developers to engage with government opportunities.
C4ISR M&A activity increased 27.9% year-over-year (YOY), posting 87 transactions in 2025. Strategics maintained a majority presence in C4ISR M&A despite being outpaced by eager financial buyers. Public prime contractors embraced the shift towards global armament, selecting M&A as the preferred method of repositioning portfolios for spaceborne defense opportunities. Smaller private companies received increased market opportunities thanks to acquisition reform, incentivizing modest transaction growth within the cohort. Financial buyers significantly expanded existing platforms, with private equity (PE) add-on transactions increasing by 76.9% YOY in pursuit of intellectual property (IP), manufacturing assets, and geographic reach. Platform investments held steady as sponsors faced a market flush with standalone developers and manufacturers suitable for add-ons, but few well-established, platform-ready businesses willing to transact.
Public companies in Capstone’s C4ISR Index outperformed the overall Public Equity market while underperforming the S&P 500 Aerospace & Defense Index. Exposure to broader Civilian IT markets restrained share performance among primes in the face of a muddied government contracting outlook in 2025. Select companies within and adjacent to the sector, including Honeywell (Nasdaq:HON), L3Harris (NYSE:LHX), and Rheinmetall (XTRA:RHM), initiated plans to pivot strategy heavily toward defense opportunities via restructuring and divestment from Civil markets.
“The Space domain continues to serve as a high growth area for both intelligence, surveillance and reconnaissance (ISR) missions and warfighting operations. Robust C4ISR M&A activity at nearly 30% YOY growth reflects a strategy to consolidate key technologies correlated to defense budget increases in the U.S. and within the NATO alliance,” said Capstone Managing Director and Head of Aerospace, Defense, Government & Security (ADGS) Investment Banking Tess Oxenstierna, the lead contributor in the newly released report.
Also included in this report:
Analysis of near-term Golden Dome funding opportunities for C4ISR technologies.
An overview of the WAS and the C4ISR M&A market implications of the program.
How geopolitical conflict and government initiatives are shaping business strategies among key prime contractors.
Why middle market C4ISR companies are positioned to capture additional market share and M&A attention.
Capstone Partners’ ADGS Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the Defense industries. Our team partners with leading mid-to-large sized business in the C4ISR market that serve growing end-markets. For more information on C4ISR market trends featured in this report or to speak with one of our ADGS Investment Banking Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.
