European NATO members have often been criticized by the US for failing to meet their defense expenditure levels. But with the recent Ukraine conflict, is that all set to change? And how will this impact dense M&A in Europe?
Under NATO guidelines, members are mandated to spend 2% of their annual economic output on defense. However, in 2020, just four EU NATO members met the threshold (per Statsita): Romania (2.3%), Estonia (2.4%), Latvia (2.5%), and Greece (2.6%). The equivalent figure for the EU as a whole (21 of the 27 EU members are part of NATO) is just 1.2%, with financial powerhouse Germany spending just 1% on defense.
However, things look set to change due to Russia’s invasion of Ukraine, a country with aspirations to join both the EU and NATO. And though conflict is bad for most parts of the economy, private businesses in the defense sector may enjoy a windfall. With the risk of a second cold war brewing, European public military spending is set to balloon.
Defense deals double
Already, there are signs that US pressure has expedited defense spending in Europe in recent years. Although the overarching M&A figures for the defense and related aerospace sectors can be fickle – both industries are relatively small compared to dealmaking mainstays financial services and TMT – 2021 was undeniably a time of plenty.
According to Mergermarket figures, 52 deals were announced last year in Europe’s defense and aerospace sectors, eclipsing the previous high in 2019 (50). The aggregate value of last year’s 52 deals, at just under €27bn, more than doubled the next highest total (€11.7bn, 2017).
After years of cuts, rising public defense expenditures will invariably feed into the private sector. National security concerns complicate cross-border defense M&A, even between long-time allies – US buyers like the look of relatively inexpensive European assets. In the end diplomacy, one hopes, will win the day.
To learn more about how M&A is faring in other sectors, please visit our Deal Drivers hub.