Defense tech M&A runs hot as government services firms work past the DOGE effect

Defense tech companies are still drawing intense buyer interest, while traditional government services firms are still working to get over the DOGE effect.

That split runs through the aerospace, defense and government services segments in DC Advisory’s latest U.S. Private Equity Mid-Market Monitor report released this week. The report covers the second and third quarters of 2026.

Defense technology and products are “white hot,” according to the investment bank. Year-to-date deal activity has been dominated by businesses with differentiated offerings, classified access and established programs of record.

But government services remains subdued. The report says traditional services firms have been driven away from consulting and labor-based delivery models by DOGE activities, which continues to influence government buying.

However, the report finds that services firms that bring proprietary IP and a technologically differentiated offering are still in higher demand.

DC Advisory counted 112 U.S. defense and government transactions in the first half of 2026. That is up 15% from 97 in the first half of 2025.

The pace dropped sharply in the second quarter. The firm tracked 43 deals, down from 69 in the first quarter and a peak of 73 in the fourth quarter of 2025.

The second quarter total ties the third quarter of 2024 for the lowest quarterly count in the 10 quarters the report tracks.

The mix of buyers shifted too. Strategic buyers accounted for 27 of the 43 deals. Sponsor-backed portfolio companies, which typically make add-on acquisitions, did 14.

Private equity firms buying directly accounted for just two deals. That is the fewest of any quarter in the data set and down from 17 in the first quarter.

But the report strikes an upbeat tone as well.

“Following a strong start to the year, we are optimistic for this M&A rebound to continue through late 2026 and into 2027,” it says.

DC Advisory says more deals are now coming from bilateral negotiations or limited processes than in prior years. In those deals, buyers and sellers reach agreement on positioning and valuation because both understand the program requirements and budget priorities involved.

For highly-differentiated acquisition targets, the report says valuations are reaching high-water marks as sellers opportunistically engage with synergistic buyers.

Cross-border activity is also accelerating despite what the firm calls onerous regulatory impediments. The report credits rising defense budgets in the U.S. and Europe for capital flowing in both directions across the Atlantic Ocean.

Buyers are concentrating on companies that solve specific, well-funded requirements. The report lists the areas drawing the most interest:

• AI
• Autonomy
• Counter-UAS
• Cyber
• C5ISR
• Electronic warfare
• Missiles and munitions
• Space
• Unmanned systems

The report also cites growing pressure on defense and national security agencies to field solutions faster and in larger quantities than in the past.

“We see buyers concentrating capital around mission-critical capabilities that address well-funded requirements, with AI, autonomy, cyber, space and unmanned systems continuing to attract strong demand,” said Managing Directors Ellis Chaplin and Chris Oliver, who lead the firm’s aerospace, defense and government services practice.

For founders, the firm’s advice is simple: stay close to mission requirements and customer pain points.

In the report’s words, that is what will make a company an attractive acquisition target as technologies and budgets shift.