C4ISR Market Report – November 2023

Capstone Partners’ latest Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) Market Report highlights how new initiatives and consistent investments in unmanned autonomous systems (UAS) from the U.S. Department of Defense (DOD) stand to bolster growth for sector players and increase buyer appetite from private equity firms in 2024.

The proliferation of autonomous aircraft and land vehicles has spurred significant demand for participants in the C4ISR market. Radio frequency (RF) communications, electro-optical (EO) components, and satellite positioning sensors have been critical to the operation and development of autonomous systems and software. New initiatives from the DOD have aimed to expand the U.S. military’s autonomous systems across multiple domains, subsequently driving consolidation activity in the C4ISR sector. The DOD’s Replicator initiative, announced in September 2023, plans to mass-produce thousands of smaller and less expensive autonomous drones. The program’s ambitious goal to build the drone swarms at scale within the next 18 to 24 months is expected to provide new contracting opportunities for sector players. Middle market businesses with command and control solutions that provide integration for unmanned systems are poised to garner increased revenue opportunities and buyer appetite in the long-term.

Active buyers in the space have already begun to tailor their acquisition strategies to fit the DOD’s UAS investments and initiatives. Anduril Industries has positioned itself as a leader in developing solutions for the DOD’s modernization projects and Replicator initiative through its acquisition of Blue Force Technologies (September 2023, undisclosed) and the development of its new Lattice command and control software for unmanned systems.

Merger and acquisition (M&A) activity in the C4ISR sector has moderated year-over-year (YOY), with 42 transactions announced or completed to-date, a 27.6% decline compared to year-to-date (YTD) 2022. Strategic buyers have capitalized on the slowing M&A environment in the sector, comprising 73.8% of total deals to-date. Typically, the total share of transactions has been more evenly distributed among buyer types, highlighting the decline in broader private equity dealmaking as a major headwind for C4ISR M&A. However, despite a decrease in transaction activity, sponsors are expected to be highly acquisitive in the sector moving into 2024. This is in large part due to lower counter-party risk in a recession resistant sector. Additionally, U.S. private equity firms have increased their equity contributions for middle market transactions with access to abundant levels of dry powder.

Also included in this report:

• A breakdown of leading buyer AeroVironment’s (Nasdaq:AVAV) recent earnings and acquisitions.
• How investments in upgrades for the DOD’s current UAS programs impact sector players.
• Data on public companies in Capstone’s C4ISR index.

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.