Europe’s defense industry is entering a phase of structural transformation, driven by geopolitical tensions, rising spending, and accelerating consolidation. Germany is at the center of this shift, rapidly expanding both demand and industrial capacity. As companies face scaling constraints and increasing complexity, M&As are becoming a critical lever to secure capabilities, strengthen supply chains, and respond to the speed of market change.
Europe’s defense sector, long a stable and moderately growing market, is shifting toward structurally higher growth. For more than three decades, European defense spending was shaped by the peace dividend. Budgets were low, industrial capacity was reduced, and supply chains were optimized for efficiency rather than resilience. After Russia’s invasion of Ukraine in 2022, geopolitical tensions intensified, warfare evolved rapidly, and reliance on US security support became less certain, forcing Europe to strengthen its capabilities.
This shift is reflected in spending. From moderate growth of 5%-6% annually until 2022, global defense expenditure accelerated sharply. It reached approximately US $2.5 trillion by 2025 and is expected to exceed $3.5 trillion by 2030. This is not a temporary spike. It marks a structural reset to a higher baseline, fundamentally changing the demand environment.
Germany is at the center of this transformation. After decades of underinvestment, it is becoming one of the world’s most dynamic defense markets. German defense spending rose from around US $56 billion in 2022 to an estimated $108 billion in 2025 and is expected to reach nearly $200 billion by 2030 (see Figure 1). This places Germany well above global growth rates.
As it grows, Germany must catch up on many years of underinvestment while building next-generation capabilities. Existing inventories must be replenished even as investments in advanced technologies accelerate. This combination is creating a level of demand intensity such that Germany is no longer just a large market; indeed, it is a central driver of industrial and strategic change across the European defense landscape.
Unfortunately, Europe’s defense industry is structurally constrained — years of optimization for efficiency rather than resilience have created systemic bottlenecks:
These constraints have created a widening gap between demand and delivery capacity. This imbalance is fast becoming a defining feature of the market.
M&A has become a central instrument to address the structural gap between rapidly increasing demand and limited industrial capacity. What was once a tactical lever is now a core element of industrial strategy, reshaping the German defense industry along multiple dimensions.
M&A activity in the German defense sector is unfolding in distinguishable phases, each driven by changes in strategic priorities (see Figure 2). The first wake-up call followed Russia’s annexation of Crimea in 2014, triggering an initial increase in defense spending and a moderate uptick in consolidation activity.
The structural break occurred in 2022, with the war in Ukraine marking the beginning of a consolidation wave. European defense policy moved away from NATO compliance toward genuine military-capability building, creating immediate pressure to scale industrial capacity. German OEMs responded by acquiring production assets, suppliers, and capabilities to accelerate output and stabilize supply chains.
As this first wave progresses, activity is moderating. The most accessible targets have been absorbed, but M&A remains at a high level. Transactions increasingly involve startups and scale-ups, and investment activity is expanding toward capital markets. A second consolidation wave is expected toward the end of the decade. Defense-tech companies established after 2022 are reaching maturity and are expected to generate renewed consolidation between 2028 and 2030.
The geographic focus of German defense M&A activity has propelled toward the domestic market (see Figure 3). Prior to 2022, domestic targets accounted for roughly a third of transactions. Since then, this share has exceeded 50%, reaching up to 70% in recent years. Structural factors are driving this new path. Supply chain disruptions have increased the need for local control of critical capabilities. At the same time, procurement requirements increasingly favor domestic production continuity.
Regulatory frameworks further reinforce this trend. Export controls, foreign investment screening, and funding mechanisms make cross-border transactions more complex and less attractive. Security clearance requirements add another layer of complexity: certified personnel and facilities cannot easily be transferred across borders. Domestic consolidation is no longer opportunistic; it has become the structurally preferred pathway.
The focus of M&A activity has been reset to changing operational priorities (see Figure 4).
Before 2022, transactions were largely driven by technological modernization with a focus on software, sensors, and advanced systems. Following the full-scale invasion of Ukraine, focus quickly transpired toward industrial capacity. Immediate shortages in ammunition, platforms, and supply chains forced OEMs to prioritize production scale and delivery capability. Industrial assets became the dominant target category.
Over time, focus should rebalance. As capacity constraints ease, attention will shift back toward technology, in part driven by defense tech companies that emerged after 2022. At the same time, transportation is becoming a structural priority. As Germany takes a larger role in NATO logistics, mobility and supply infrastructure are gaining strategic importance. This creates a clear sequencing logic: capacity first, followed by technology, with transportation emerging as a permanent third pillar.
The strategic logic of M&A has fundamentally changed (see Figure 5). Prior to 2022, transactions were primarily driven by market consolidation. Companies focused on gaining market share through horizontal acquisitions in a fragmented but stable environment. Today, the focus is on securing supply chain control and delivery capability. Rising demand and operational pressure have made supplier dependencies a critical risk. As a result, vertical transactions are gaining importance and expected to dominate going forward.
At the same time, deal structures are evolving. Companies increasingly focus on acquiring specific assets, capabilities, or production lines rather than entire organizations. These targeted transactions are faster to execute and more effective in addressing bottlenecks. This reflects a broader shift: the objective is no longer scale, but control. M&A is becoming a vital tool to secure critical capabilities and ensure operational resilience.
Germany is becoming the central growth engine of Europe’s defense industry transformation. As rising demand collides with structural capacity constraints, companies must strengthen industrial resilience, secure critical capabilities, and scale operations faster than traditional models allow. To succeed, players should focus on:
By Simon Dornauer, Felix von Rönne
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