2025: Defense Dealmaking in the Year of Disruption

Key Takeaways

As the Department of Defense undergoes a significant shift in spending and acquisition strategy, there will be clear winners and losers.
Defense tech disruptors have the potential to increase their market position, while defense prime contractors will likely look to exit certain businesses and double-down on others.
Dealmakers should look to examine and execute various strategies and remain agile to adapt to changes in this space.

Introduction

Escalating geopolitical tensions and increased military spending by governments across the world have accelerated development and adoption of technological advancements, including AI and autonomous systems. The U.S. Department of Defense (“DoD”) announced a proposed budget of $1.01 trillion for Fiscal Year 2026 (“FY2026”), with a significant emphasis on the “development and deployment of a Golden Dome for America,” in the “skinny” version of the budget released in early May.¹ This follows a 2025 budget that reduced resources allocated to research, development, test and evaluation (“RDT&E”) and increased the prioritization of procurement around key capabilities.² As the DoD undergoes a significant shift in its spending and acquisition strategy, there will be clear winners and losers. While some companies will come out stronger, others likely will look very different — or disappear altogether.

We anticipate an industry reshuffling to occur throughout the coming years. Defense tech disruptors have an opportunity to increase their market position, whereas defense prime contractors will likely look to divest certain non-core assets. For dealmakers, understanding the DoD’s spending priorities and acquisition reform plans will be critical in determining the best strategy for your business.

Shifts in Spend and Acquisition

The defense budget for FY2026 called for significant shifts in spending, as Secretary of Defense (“SecDef”) Pete Hegseth is reportedly ordering the redirection of $50 billion in funding to align with Trump Administration priorities.³ These priorities include strengthening the U.S. military’s capabilities, including through the development of a Golden Dome, the new national missile defense shield announced early in Trump’s presidency, as well as enhanced border security measures.⁴ The overall budget request exceeded $1 trillion dollars, and prioritized space dominance, fighter aircraft, nuclear deterrence and the Golden Dome missile defense shield.⁵

In addition, on April 9, President Trump announced a number of executive orders seeking to modernize the current defense acquisition process.⁶ The Modernizing Defense Acquisition and Spurring Innovation Executive Order called upon the SecDef to submit a series of plans that reform and accelerate the DoD’s acquisition process by prioritizing commercial solutions and broadening the use of Other Transaction Authority (“OTA”), which is often used to engage nontraditional defense contractors.⁷ The order also calls upon the SecDef to identify major defense acquisition programs that are more than 15% behind schedule, 15% over cost, or misaligned with the SecDef’s mission priorities. Once identified, those programs are then at risk to be recommended for cancellation within 90 days of the executive order.⁸

The New Competitive Landscape

As the DoD extends more firm, fixed-price contracts and reduces barriers for acquisition, defense tech disruptors are looking to grow their market position.^{9, 10, 11} As we’ve seen previously during times of change or economic shifts, defense primes — like manufacturing companies — are likely re-evaluating their business priorities and current offerings. In some cases, they may be looking to build up various capabilities and shed other business lines as they aim to maximize both short- and long-term profitability.

Acquisition Strategies

In this environment of rapidly shifting priorities, it will be critical to have a thorough understanding of the current landscape and how it might change. An industry reshuffle will offer dealmakers opportunities to execute new strategies to ensure profitability for their businesses. If you are a dealmaker, you may look to:

Acquire steady businesses that have been undercapitalized. Rising players in the defense space without sufficient capital may represent a promising target for acquisition.
Acquire and integrate hardware and software companies to offer a unique solution. Build a new company from different individual capabilities.
Consolidate your supply chain to generate more scale and efficiency. Seek to buy smaller businesses to scale and/or resell.

Dealmaking Priorities

Regardless of your dealmaking strategy, it will be crucial to consider four key imperatives when evaluating, acquiring or selling assets in the current environment:

Conduct enhanced diligence. Examine government spending priorities and acquisition reform plans regularly to proactively drive growth and mitigate risk.
Communicate clearly with stakeholders. Prepare multistakeholder communications to understand investor priorities ahead of a transaction to ensure transparency and alignment.
Prepare for regulatory considerations. Communicate with government customers and agencies, as regulatory approvals will be an important aspect of these deals.
Build the right systems and culture to accelerate target realization. Establish effective processes and procedures that facilitate the efficient acquisition or sale of an asset.

Although it remains uncertain how and when defense deals may take shape — as well as their size and impact — the key to navigating the future lies in being proactive. By engaging a trusted advisor with proven experience across the defense sector, dealmakers can better position their businesses to effectively respond to changes and capitalize on emerging opportunities.

Footnotes:

1: “Trump Proposes Slashing Domestic Spending to the Lowest Level of the Modern Era,” The New York Times (May 2, 2025).

2: “Long-term Implications of the 2025 Future Years Defense Program,” The Congressional Business Office (Nov. 20, 2024).

3: “Hegseth seeks to shift $50 billion in FY26 budget proposal,” Defense One (Feb. 19, 2025).

4: “Pentagon proposes $50 billion in annual cuts and identifies priorities to expand,” NPR (Feb. 20, 2025).

5: “Fiscal Year 2026 Discretionary Budget Request,” Executive Office of the President, Office of Management and Budget (May 2, 2025).

6: “Modernizing Defense Acquisitions and Spurring Innovation in the Defense Industrial Base,” whitehouse.gov (April 9, 2025).

7: Id.

8: Id.

9: “Department of Defense Awards $14.3 Million to Expand Sources of Solid Rocket Motors,” U.S. Department of Defense (Jan. 7, 2025).

10: Harper, Jon, “Palantir lands $480M Army contract for Maven artificial intelligence tech,” DefenseScoop (May 29, 2024).

11: Krause, Reinhardt, “Palantir To Win U.S. Army Contract With L3Harris, Anduril, Says Analyst,” Investor’s Business Daily (Apr. 2, 2025).