The defence and aerospace industry is in the midst of a strategic transformation. As geopolitical tensions rise and defence budgets grow, consolidation, innovation, and capability-building have become key themes across Europe and the UK. Mergers and acquisitions (M&A) are playing a crucial role in this development.
Yet transactions in this space differ significantly from those in other industries. National security reviews, export controls, and foreign investment restrictions add layers of complexity. So, what does it take to execute a successful deal in this highly regulated and politically sensitive sector?
A regulatory minefield: what buyers must consider
In contrast to conventional industries, M&A in the defence and aerospace sector routinely triggers enhanced scrutiny—often across multiple jurisdictions.
Foreign Direct Investment (FDI) screening
European Union and Germany
In Germany and many EU member states, foreign investment in defence and critical technologies requires mandatory FDI screening. Germany enforces one of the strictest regimes, with thresholds starting as low as 10% for share acquisitions (sections 60 et seq. of the Foreign Trade and Payments Ordinance – AWV).
Authorities assess not just the investor's profile, but also the target’s business activities and any potential national security risks. Non-EU/EEA investors in particular can expect a thorough review that may take several months. Early engagement with regulators is key.
United Kingdom
The UK’s National Security and Investment Act 2021 (NSI Act), in force since January 2022, has introduced one of the most robust FDI screening regimes globally. It mandates notification for acquisitions in 17 sensitive sectors, including defence and dual-use technologies.
Any deal involving more than 25% of shares or voting rights – or even “material influence” – must be cleared by the Secretary of State prior to closing. The Investment Security Unit (ISU) oversees these assessments, with timelines starting at 30 working days (extendable to 75).
Importantly, the NSI Act also includes a "call-in" power: the government can retroactively review transactions for up to five years – even if they weren’t notified – if national security concerns arise.
Between April 2023 and March 2024, 847 notifications were submitted, but only 37 were called in. Still, the need for notification (mandatory or voluntary) should be factored into any deal timeline early on.
Export controls and ITAR risks
Many targets in this space are subject to defence contracts or manage dual-use technologies. Buyers must evaluate both historical compliance and future licensing requirements –particularly where US-origin technology or non-EU buyers are involved.
US export regulations
US laws such as the International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR) may apply extraterritorially. That means even non-US buyers might require licences to acquire businesses dealing with US-origin items, software, or technology.
-
ITAR, governed by the US Department of State, regulates military-specific goods and services.
-
-
EAR, overseen by the US Department of Commerce, covers dual-use items—those that can serve both civilian and military purposes.
These frameworks can restrict post-closing operations, including internal information-sharing and product development.
UK export controls
The UK’s export regime, managed by the Export Control Joint Unit (ECJU), covers military goods, dual-use items, and technology transfers. Its scope has expanded post-Brexit, now including emerging technologies such as AI, quantum computing, and advanced materials.
Particularly relevant to M&A are:
- items on the UK Military List (Export Control Order 2008)
- dual-use goods under the Dual-Use Items Export Control Regulations 2021
- software or technology transfers during reorganisations.
Critically, a change in ownership may itself qualify as an "export," triggering the need for new licences.
Government secrecy and security clearances
Germany and EU
If a target company holds classified contracts, a change in ownership may require pre-approval. Germany's Sicherheitsüberprüfungsgesetz (Security Clearance Act) mandates that new foreign shareholders or key personnel undergo screening.
This affects due diligence—especially where highly sensitive information can only be reviewed by security-cleared individuals or "clean teams".
United Kingdom
The UK maintains a layered vetting system via UK Security Vetting (UKSV), covering both facilities and personnel. Buyers must pay close attention to:
-
List X status: targets dealing with classified UK government data must be approved and regularly audited.
- Foreign ownership restrictions: High-security projects may be off-limits to buyers from outside trusted jurisdictions (eg the Five Eyes alliance).
- Staff continuity: Maintaining security-cleared personnel is essential to avoid service disruption.
After closing, additional security protocols may apply, such as creating ring-fenced IT environments or preserving separate legal entities for sensitive projects.
Antitrust and state aid considerations
Large defence M&A deals can also attract competition scrutiny, especially in areas like aerospace or land systems.
UK competition law
The UK’s Competition and Markets Authority (CMA) reviews defence M&A under traditional merger thresholds (£70 million turnover or 25% market share) alongside the NSI Act. Even in concentrated markets—where governments are often the sole buyer—antitrust concerns can arise.
Recent CMA cases have focused on:
- vertical integration risks in defence supply chains
- the impact of consolidation on innovation
- government procurement flexibility.
Publicly funded or state-owned buyers must also consider compliance with EU State aid rules (which continue to apply in Northern Ireland) and the UK Subsidy Control Act 2022.
Structuring for success
To avoid regulatory delays – or even deal failure – buyers must approach legal hurdles proactively. A few key best practices include:
- Start regulatory diligence early - Identify security-related, export, or FDI risks as early as possible. If licences or clearances are needed, involve legal counsel and consider pre-filing consultations with relevant agencies.
- Review change-of-control clauses - government contracts may contain veto or termination rights in the event of ownership changes – especially in Single Source Contract Regulations (SSCR) or Ministry of Defence (MoD) deals. Map out all such contracts and identify what approvals will be required.
- Understand IP and export-controlled data - It’s essential to know where sensitive data resides – particularly software or systems incorporating export-controlled technologies. Clarify who holds the IP, whether it can be transferred, and what authorisations are needed.
- Align with government objectives - many defence businesses are partly state-owned or subject to sovereign oversight. Structuring the deal to support government goals – like domestic capability or job protection – can be critical to obtaining approvals.
- Manage dual-use compliance - emerging technologies – such as AI, encrypted communications, or satellite systems – can fall under dual-use rules. Buyers must determine if licences are transferrable and prepare compliance programmes for the post-closing phase.
Market trends: innovation and investment drivers
As the modern battlefield becomes more digital, start-ups and dual-use companies are reshaping the landscape – from autonomous drones and AI-driven targeting to space-based intelligence platforms.
Public investment is catalysing growth
Governments are backing innovation at scale:
The European Defence Fund (EDF) provides €7.9 billion until 2027 for projects in AI, space, and cybersecurity.
NATO’s Innovation Fund is investing €1 billion in early-stage DefenceTech.
In the UK, support includes:
- the £6.6 billion Defence Innovation Fund
The National Cyber Force for offensive cyber operations
- space innovation through the UK Space Agency
- government-led procurement challenges via Innovate UK.
This environment has sparked a surge in private capital. Defence-focused VC and PE funds are emerging, and legacy primes are investing in innovation – either via in-house venture units or through strategic acquisitions.
Prominent examples include:
-
Helsing – AI for defence
- Quantum Systems – tactical drones
- Spire – satellite data and analytics.
All have raised significant funds and are now partnering with governments and defence contractors – creating compelling opportunities for M&A, joint ventures, and IP-driven collaborations.
Outlook: opportunity meets complexity
Amidst increasing demand for sovereign capabilities and digital transformation, the European and UK defence and aerospace markets are ripe for investment. From software-defined defence systems to drone and AI-based applications, new players are emerging, often backed by PE/VC or state funds. For established primes, acquiring innovation externally is often faster and more efficient than developing in-house.
However, with opportunity comes complexity: legal, political, and strategic dimensions must be carefully balanced across multiple jurisdictions. Early-stage preparation, regulatory foresight, and sector-specific legal advice are key to realising value in this dynamic and highly regulated sector.
Taylor Wessing advises corporates and investors on the full lifecycle of defence M&A – from deal strategy and due diligence to regulatory clearance and integration across European and UK jurisdictions.
Get in touch with our experts to discuss how we can support your next move.
