Mergers and acquisitions (M&A) in the defense sector have picked up significantly since the U.S. election last November. Some patterns have emerged so far in this activity, and another related factor will bear on the sector.

The increase in M&A activity should not have come as a surprise in the U.S. Historical data suggests that presidential election years typically see a lull, most likely because of the uncertainty surrounding the potential transition from one administration to another. In December, Lockheed Martin announced its intent to purchase Aerojet Rocketdyne, and then Northrop Grumman divested its federal IT and mission support businesses to Veritas Capital. Two days before Christmas, Elbit Systems announced a deal to buy Sparton from private equity firm Cerberus.

The activity continued into January with Teledyne Technologies announcing a deal to merge with FLIR Systems, Perpecta reaching an agreement to be purchased by Veritas and AeroVironment announcing it would buy Arcturus. February saw announcements that Cubic was to be purchased by Veritas and Elliot Management, Leidos would buy Gibbs & Cox and Serco would acquire Whitney, Bradley & Brown. In the first week in March, L3Harris Technologies announced the sale of two businesses, including its military simulation business to CAE. There were other smaller deals as well.

The total value of deals announced so far in 2021 for defense properties in excess of $100 million each is $19.7 billion, compared with $13.3 billion in all of 2020.

Another notable change so far in 2021 has been deals involving special-purpose acquisition companies (SPAC). Recent SPAC deals announced have been in sectors adjacent to defense and could provide products and services to military customers. NavSight announced its SPAC would merge with Spire Global, a space-based surveillance/data analytics company. Osprey Technology announced its SPAC would invest in BlackSky, a satellite-imaging company. Vector Acquisition is merging with Rocket Lab, and New Providence Acquisition announced its SPAC has invested in AST & Science.

The final development of note is Leonardo’s announcement that it was offering shares in its U.S. defense electronics business, DRS. Presuming this offering takes place, Leonardo will use proceeds to invest in European defense and will still have control of DRS, but DRS may be able to plot a more independent path forward.

There are five conclusions and observations to draw from this spurt in M&A and strategic investment activity in defense.

First, the U.S. government review of the Lockheed Martin acquisition of Aerojet Rocketdyne may be the most consequential of pending deals. Raytheon Technologies has raised objections to the deal, but a green light could signal further vertical integration within the U.S. defense sector.

Second, both Northrop Grumman and L3Harris announced that proceeds from the businesses they are selling would be used to repurchase their shares. Of course, management could pursue other options, including venture investing, smaller M&A deals and/or diversification. Share buybacks are probably the most conservative use of proceeds, but it is an open question if flattening defense spending, elevated security demands and rapidly advancing technology merit that approach.

Private equity firms have been both buyers and sellers in recent months, which leads to a third point. Private equity activity may not be seen as an indicator of depressed or excessive valuations. Each transaction has to be evaluated on its own merits, but that said, private equity firms will invest with an intent to exit at some point at a higher price than they paid. That should provide some confidence in the outlook for sectors in which private equity is buying.

A fourth point is investment inflow via SPACs. This has the potential to create new and stronger competitors in sectors adjacent to defense that could address new and emerging defense needs. Not all SPAC mergers/investments will succeed, but small technology companies will have new capital to invest and publicly traded stock that can be used to incentivize current and future employees.

The fifth point is that while not many publicly traded midsize defense contractors focus on products, some of the deal activity suggests the midtier of the sector is still there—it is just not as apparent. FLIR will still be in the unmanned vehicle and imaging sensor market as part of Teledyne, and Cubic’s deal is about an ownership change. The landscape also is changing to the extent that firms that historically have been thought of as focused on information technology and services, such as CACI and Leidos, have focused on products in recent years.

Portfolio-shaping and M&A should remain a key defense theme in 2021. Companies large and small will constantly have to assess and reassess where they can best compete, what capabilities they need to do so and whether a business may be of higher value to another owner. Bankers and advisors should not plan on lengthy breaks in 2021.