Oaklins: Geopolitics and M&A are rewriting Europe’s defense playbook
The European aerospace and defense industry is entering a period of prolonged expansion driven by a notable uptick in M&A activity. A market report from Oaklins reveals that geopolitical tensions and a push for strategic autonomy are driving governments to significantly increase their defense spending.
European defence policy has undergone a marked shift, with policymakers elevating defence to a strategic priority after years of relative underinvestment. As national militaries ramp up their capabilities, discussions have also intensified around the idea of a European army – a multinational, unified force that some within the EU believe could strengthen the bloc’s strategic autonomy and reduce its reliance on external security partners.
Spending on the rise
This shift is reflected in the numbers. While the global defense market is growing steadily at approximately 5% annually, European defense markets are projected to grow by an average of around 6.4% annually between 2026 and 2031.
By comparison, the US defense market is expected to grow by 3.6% annually over the same period. The rapid growth in Europe is driven by a desire to build domestic industrial capacity, secure supply chains, and reduce dependence on non-European suppliers.
The Oaklins report highlights how defense spending across key European countries has increased from around $202 billion in 2019 to $346 billion in 2025, representing a CAGR of 9.4%. This broad-based increase underscores the scale of Europe’s rearmament cycle to date.
Despite the clear reprioritization of defense, European spending remains significantly below US levels in absolute terms, highlighting the considerable runway still ahead to strengthen Europe’s military capabilities and industrial base. Being behind the US in military spending is not surprising: The Americans spend the most by far – over three times as much as the second largest spender, China.
M&A and rising valuations
The spending surge is driving a major consolidation wave across Europe, which has historically had a highly fragmented defense sector. Larger defense suppliers are actively acquiring smaller, specialized companies to gain scale and secure critical technologies. Industry experts note that governments now prioritize delivery speed, origin of components, and long-term security of supply over choosing the lowest-cost option.
This high demand is also pushing company valuations upward. In early 2023, European aerospace and defense companies traded at valuation multiples of around 10.8 times their core earnings, while US companies traded at 14.8 times. By mid-2026, this gap had nearly closed, with European companies trading at approximately 17.2 times earnings compared to 18.3 times for US companies.
Leonardo – a large Italy-based aerospace, defense and security company – leads the way in consolidation with 7 acquisitions in the last 12 months. Leonardo’s acquisition strategy is focused on expanding its position as an integrated European defense and security platform. Recent activity combines expansion into adjacent defense markets, such as land platforms, with targeted additions in cyber, secure communications and digital-defense capabilities.
Not far behind is Spain’s Indra, a leading company working in defense, air traffic, space, and digital solutions, which acquired 5 companies since last year. Indra’s consolidation strategy is centered on Spain and Europe, with space and defense sovereignty as the main themes. The M&A pattern shows that Indra is trying to take more control over key defense capabilities, like in the case of a recent deal with drone-maker Aertec DAS.
The rise of space security
One of the most notable areas of investment is space situational awareness, which is the tracking and monitoring of satellites and debris in orbit. Space is now generally seen as an active operational domain. With thousands of new satellites entering orbit, understanding potential threats and avoiding collisions has become essential for national security.
This has turned space monitoring from a niche safety function into a vital part of defense infrastructure. Companies specializing in tracking software, AI analytics, and radar systems have become highly attractive. Large defense companies are actively acquiring these businesses to quickly secure specialized technology and data capabilities that would be difficult to build from scratch.
“Software-defined systems, AI, autonomous systems, advanced sensors, cyber security, and resilient space infrastructure will be among the most critical capabilities,” said Kirsten Drost, CCO of S[&]T, a leading aerospace and defense technology company.
“Increasingly, the focus is not only on platforms such as drones or satellites, but on the underlying digital and data infrastructure. This includes edge and cloud computing, onboard processing, secure communications, and the ability to process and fuse large volumes of sensor data in near real time. This moves value creation from hardware alone toward the digital backbone of defense systems.”
The outlook for private capital
Private equity firms and investors are showing a strong interest in the defense sector. Historically, defense was avoided by many European investors due to ethical constraints, but this perspective has shifted. Investors are now drawn to the long-term, government-backed contracts and the opportunities to merge smaller players in fragmented fields like cybersecurity, autonomous systems, and advanced sensors.
Over the next five years, the European defense landscape is expected to see even greater cross-border partnership and consolidation. The heavy investment in defense technology is also expected to cross over into the civilian domain.
“The next wave of aerospace and defense M&A will be driven by the need to secure critical technologies, retain strategic innovation within Europe, strengthen supply chains and expand industrial capacity rather than simply gaining scale,” said Jan-Pieter van Doorn, head of aerospace and defense at Oaklins.
