Defense & Aerospace M&A

Value a defense or aerospace business one program at a time. For each program, ask who funds it, what the contract requires, whether the target can deliver, and whether a change of owner affects its right to keep performing. A large backlog, a cleared workforce, or a position on an aircraft platform is worth only the cash it will produce.

The work spans government-contracts counsel, program management, engineering, manufacturing, security, finance, and integration. Each function sees a different way an attractive strategic asset can turn into a costly delivery obligation.

Decide which program positions you are buying

Start with what you want: a program position, a technology, production capacity, a supplier capability, an aftermarket franchise, or access to a customer's mission. Then list the assets that carry that value: technical data rights, qualified processes, facilities, people, suppliers, tooling, certifications, and customer approvals.

Three situations need extra care:

• Buying a supplier that also serves your competitors. When a prime contractor buys a subsystem supplier, rival primes may move their work elsewhere. Count that lost revenue in the case.
• Buying a capability. A working prototype and repeatable production are different assets. Establish which one you are paying for.
• Commercial aerospace. Separate demand for equipment on new aircraft from the maintenance and replacement economics of the fleet already flying.

Build the evidence pack program by program

The table lists the evidence each workstream needs and what it changes in the bid or the operating plan.

Reconcile program schedules to the general ledger, the valuation model, and management reporting. Pull the same fields from every contract into one table, so the programs can be compared. Watch the estimate at completion (EAC), the contractor's current forecast of a contract's total cost. When business reviews call a program healthy but its EAC keeps rising, put that contradiction in front of the committee.

Turn backlog into expected cash

Keep four categories apart: funded orders, unfunded portions, unexercised options, and prospective awards. With counsel and program leadership, review the customer's rights and each program's budget, schedule, acceptance, and performance dependencies. Never multiply reported backlog by a generic percentage.

Build delivery and collection schedules that include material purchases, inventory buffers, milestone and advance payments, retainage, and the timing of customer acceptance. The contract type decides which risks to test:

• Fixed-price contracts: the contractor absorbs cost overruns. Test labor productivity, material inflation, engineering changes, and schedule penalties where the contract provides for them.
• Cost-reimbursable contracts: the government pays allowable costs plus a fee. Investigate cost allowability, billing rates, audits, and collection timing with the relevant specialists.

Look at concentration by program as well as by customer name. Several contracts can depend on the same platform, appropriation, prime contractor, or technical milestone. Combine those linked downside exposures in the valuation instead of treating each contract as independent diversification.

Read the budget documents behind each program

Backlog shows what the customer has ordered. The budget shows what the customer plans to buy next, and whether that plan has changed. With each US budget request, the Department of Defense and the military departments publish justification books. Procurement exhibits give quantities and funding by line item; research, development, test and evaluation (RDT&E) exhibits do the same by program element. Both carry projections for later years. The Pentagon's daily contract announcements and award records on USAspending.gov show what was actually awarded. GAO's annual assessment of major weapon programs adds an independent view of cost and schedule.

A seller's forecast is often built on last year's budget, or on the quantities a program office hoped for. Compare the forecast program by program with the latest request, and the latest request with the one before. That catches cuts, stretched production, and late new starts before they reach the price. All of this is public, so the work can start before the data room opens and without touching restricted program material.

A hypothetical example:

Red programs go into the downside case with the delay or cut the budget implies. Amber programs become questions for program leadership and customer calls. Unmatched revenue is a finding in itself, so ask how management forecasts it. The one check that matters: a budget request is a plan, not money. Before treating a requested increase as funded, check the enacted appropriation and whether a continuing resolution is in force, since it generally blocks new starts and production increases.

Settle ownership questions before fixing the structure

Map the contracting entities, facilities, security arrangements, export-controlled activities, foreign ownership, and the planned governance after closing. Ask qualified counsel and security leadership for a path on each issue, with its dependencies, the responsible authority, and timing. Clearances and authorizations do not transfer automatically with a purchase agreement. Eligibility, transferability, and government consent are conclusions for those specialists, based on the actual structure and documents. Export-controlled technical data also limits who may review it, including advisers who are foreign persons, so plan diligence access with counsel.

For US federal contracts, FAR 42.1204 addresses stock purchases. A novation agreement is unnecessary when the contracting party does not legally change, stays in control of the assets, and keeps performing the contract. The same paragraph adds that a change in ownership, by stock or asset purchase, may still raise issues best settled in a formal agreement with the government. Asset transfers need a different analysis, so never reduce the rule to “every acquisition needs a novation.” FAR 42.1204.

Track each contract on a checklist with counsel's conclusion, supporting facts, filing or notification requirements, who contacts the customer, and the effect on closing and later restructuring. A structure that works at signing can create new issues if the integration team later moves assets or merges entities.

Use precedents to frame questions, not to predict approval

L3Harris completed its acquisition of Aerojet Rocketdyne on July 28, 2023. The closing announcement proves that deal closed. It does not show that another buyer, structure, or integration plan would reach the same outcome. Use precedents to prepare questions for advisers. L3Harris closing announcement.

Test the bottleneck, then each aircraft platform

Inspect production at the bottleneck instead of relying on average plant utilization. Ask what limits accepted output: skilled labor, a test stand, a sole-source component, a qualified process, or customer inspection. Find the investment and qualification work needed to raise capacity, and carry the schedule risk into the cash model.

For aerospace suppliers, start from each major platform's delivery assumptions and the target's content per aircraft. Separate commercial agreements, price escalators, customer-owned tooling, warranties, and inventory exposure. In aftermarket businesses, reconcile the claimed installed base to the parts the target can actually service and the rights it holds. An aircraft in service is a revenue opportunity only if the target has the product, the rights, and the access to serve it.

Quality and safety leaders should own the review of nonconformances, corrective actions, escapes (defects that reached the customer), audit findings, and whether fixes worked. Their conclusions must shape staffing and capital plans, instead of sitting in a report the valuation team never reads.

Example: $500 million of backlog, $250 million to analyze

This example is fictional.

A supplier reports $500 million of backlog. The schedule includes $180 million of unexercised options and $70 million tied to a program whose delivery plan depends on a new test facility. The remaining $250 million still needs analysis of margin, performance, and collection.

The buyer models the options separately, budgets the facility and its qualification work, and delays the related cash flows until the evidence supports delivery. It also finds that two supposedly independent programs share one sole-source component, and tests them together. The result may still support the acquisition. It will not support paying as if the whole backlog were funded, profitable, and ready to deliver.

Set up integration controls before closing

Before closing, assign owners for customer continuity, payroll and cleared staff, supplier payments, security boundaries, program reporting, and quality escalation. Mark which synergies depend on approvals, data access, or production requalification, and keep those benefits conditional in the plan.

After closing, review accepted deliveries, movements in cost to complete, cash collection, quality escapes, critical vacancies, and supplier constraints alongside the financials. The program executive owns delivery recovery. Finance validates the cash effects. Security and counsel approve relevant organizational changes. The integration leader manages dependencies.

Give the committee a program cash-flow model, an ownership and contract continuity memo, a production readiness assessment, a capital plan, and a downside scenario. These carry more weight than any premium for backlog, clearances, or strategic importance.

Related resources

Continue with Engineering & Industrial M&A, Cross-Border M&A, and Issue & Risk Management.