British defence expertise expected to attract foreign bidders

Corporate M&A expert Robert Moir, who leads Pinsent Masons’ collaboration with Wall St law firms, and merger control specialist Paul Williams, also of Pinsent Masons, said the increased interest in UK defence technology and defence infrastructure is likely to draw significant political attention. They said defence companies seeking fresh investment or as potential takeover offerees should prepare for any deals to come under political and legal scrutiny and to require approval from the UK government.

“The defence sector is at the intersection of two significant policy initiatives in Europe – the desire for greater independence for Europe’s defence capabilities, in response to political pressure, and the desire across European economies to drive economic growth,” Moir said. “Coupled with that is the global nature of the defence industry and the wider desire in the US and elsewhere to secure capacity and expertise, and generate attractive investment returns. Defence is therefore increasingly being used as an economic and political lever.”

“As European leaders move to increase defence spending within NATO and to reduce reliance on the US, we expect this to lead to an increase in deal-making – the evolution of warfare and soft power techniques and the prospect of growth in manufacturing of military equipment and innovation such as drones will spur interest from foreign acquirers, particularly private equity with substantial cash to invest,” Moir added. It has also been reported that London-listed semiconductor manufacturer Alphawave is the target for potential acquisition by US chips giant Qualcomm.

The warming of investor interest towards the global defence sector in the current geopolitical context is allied to concerns over liquidity and perceived underperformance of defence stocks in the UK stock market – concerns that the Financial Conduct Authority has moved to address with a statement regarding its sustainability rules and their impact on defence sector growth.

Recent data from investment analysts PitchBook suggests there is already an uptick in corporate transactions in the global defence sector. According to that data, deal making in the global aerospace and defence sector increased in 2024 after two years of decline. There were 274 deals in total – the most of any year in the past decade – with most of the deal activity, 159 deals, happening in the second half of 2024. The total value of the deals in the sector in 2024 was $36.8bn – $10bn more than in 2023.

This trend is likely to accelerate over the coming years in the UK and Europe through both consolidation between complimentary businesses and via inbound investors, according to Moir. He suspects that M&A teams within law firms will be busy as a result, with the numbers of security-cleared practitioners, plus government and defence contracting expertise, expected to be key factors in evaluating transactions.

A recent example in the UK market has been US-based private equity investor Bain Capital’s reported £1.1 billion bid to acquire UK-based and FTSE 250 defence supplier Chemring. Late last year, Bain Capital highlighted the opportunity for private capital to support the modernisation of US defence capabilities at a time of increased constraints on public spending. It said, “venture and growth equity investors are likely to fund companies in areas such as small uncrewed aerial systems, uncrewed maritime vessels, low-cost and proliferated space sensors, and enabling technologies like artificial intelligence”.

Williams said bids to acquire UK defence companies would fall subject to scrutiny under the UK’s National Security and Investment Act (NSIA).

Under the NSIA, businesses and investors face potential mandatory pre-notification requirements or the prospect of transactions being ‘called in’ for national security review.

Under the mandatory pre-notification regime, businesses and investors must notify the UK government of certain ‘notifiable acquisitions’ that relate to 17 sensitive areas of the economy – including defence. Notifiable acquisitions include the acquisition of a 25% stake or more, or equivalent levels of voting rights, including certain ‘veto’ rights, in an entity carrying on activities in the UK or supply goods or services to people in the UK, as well as to proposed increases in interest above the 25% threshold.

Under the call-in regime, the range of transactions in-scope is much broader – among other things, the regime gives the UK government scope to scrutinise the acquisition of certain rights or interests in “qualifying assets”, including land or intellectual property, giving control/use in relation to the asset. 

Williams said: “In terms of the application of the Act to the defence sector, it captures any purchase of any private or public company that is either a direct contractor or a subcontractor to the Ministry of Defence. So, it captures a lot of companies throughout the supply chain. The concept of ‘national security’ under the Act is not defined in legislation, with the government providing guidance on the types of targets and acquirers that are more likely to raise concerns: the regime provides the government with flexibility over which deals are subject to scrutiny.”

Williams highlighted data that shows that the government already scrutinises defence sector deals more often than any other sector, under the NSIA. According to the last annual report on the NSIA published by the government for year 2023-24, 48% of notifications accepted were associated with the defence sector. In addition, of the five ‘final orders’ issued in relation to deals in 2023/24 – where the government can impose conditions on deals being completed to mitigate risks to national security arising from an acquisition – four were associated with the defence sector.

Williams said: “Defence sector transactions are already under scrutiny and there have been a few in the last year that have led to remedies, where the deals have been allowed but have been subject to strong conditions – including in March 2025 in the case of the proposed acquisition of UK cyber defence business Amiosec Limited by Australian company Pen10 Ltd. Examples of these conditions include requirements to ensure manufacturing capabilities are not offshored, that certain sensitive information is not passed up the corporate chain to the ultimate owners, and that the key people obtain UK government security clearance. Since the NSIA began operating, there have also been a couple of deals prohibited in the defence sector.”

Earlier this year, the UK government intervened to impose remedies in relation to the acquisition of British naval-defence supplier Ultra PMES Limited by US engineering group ESCO Maritime Solutions Limited (EMSL). In that case, unspecified sovereignty requirements and further security clearance requirements for board members formed part of the package of remedies the government required the parties to accept in order for the acquisition to go ahead.

Williams said businesses should distinguish their understanding of how the NSIA regime is operated from the UK government’s separate push to streamline merger control processes under the UK’s competition regime – in March 2025, the Treasury confirmed it intends to legislate to “improve the pace, predictability and proportionality of the UK’s competition regimes”. Those reforms will include “proposals to provide more certainty on where mergers will be subject to investigation in the UK”, it said.

Moir said: “While there is a widespread acceptance across the political spectrum that Europe does need to invest more in its defence capabilities, there is also unease about what the resetting of international norms and relations means for the UK and Europe’s defence and security. In the UK, that feeling is likely to influence the operation of the NSIA regime, where it can easily be imagined that the government will be put under political pressure carefully to scrutinise inbound takeovers of defence sector assets.”

“There was a lot of critical commentary around the deal the previous UK government sanctioned that resulted in the sale of UK engineering company GKN to US aerospace company Melrose Industries in 2018, as there was when US private equity firm Advent acquired Cobham the following year. And these examples were before recent geopolitical developments, so one can imagine that the level of scrutiny of any proposed acquisition of one of the UK defence sector’s ‘Crown jewels’ in the current environment would be several magnitudes greater than it was then,” he added.

According to Moir, for UK defence companies that might welcome fresh investment or combination, there is potential for conflict between what they want to achieve and the prevailing attitude towards a deal within UK politics and the media.

“Defence businesses need to give thought to this and develop a strategy for managing public communications and the NSIA process, to account for the overlap between political noise and legal process,” Moir said. “Ultimately, they should expect their deals to attract significant scrutiny, and factor that into their envisaged deal completion timelines. They can, however, take comfort from the evidence of recent cases where the majority of deals falling subject to national security review – including the deal for Royal Mail – have been cleared.”