The prolonged war in Ukraine has already reshaped the defence tech sector over the past few years. Recently, however, rapid developments—sparked by unexpected policy shifts and evolving geopolitical dynamics—might affect the M&A environment in profound ways.
This international paradigm shift will most likely influence European industrial policy, introducing both challenges and opportunities for dealmakers.
How intensifying geopolitical dynamics impact cross-border deals
Defence transactions are increasingly linked with national security imperatives and state-backed funding. With the European Investment Bank lifting limits on defence financing—and with indications of a potential €800bn mobilization plan—the market anticipates not only tighter regulatory scrutiny and more complex FDI screenings but also heightened competition for attractive assets.
From an M&A, private equity (PE), and venture capital (VC) perspective, the influx of capital could drive premium valuations and accelerated deal activity, particularly in sectors where dual-use technologies and critical infrastructure are involved.
In Finland, planned FDI regime updates aim to broaden scope to critical technologies like AI, semiconductors, and quantum tech, with discussions on shifting from voluntary to mandatory filings for acquisitions in key sectors such as energy, transport, and IT security. These changes could add another layer of complexity for non-EU buyers pursuing European assets, prompting a fresh look at cross-border deal structures that balance traditional financial metrics with emerging political risk considerations. It also increases the importance of deal preparation and thorough due diligence, particularly regarding national security reviews and resilience assessments.
Private capital aligning with public mandates, catalyzing defence sector innovation and growth
As EU and NATO countries significantly boost their defence budgets, a trend seems to be emerging where private capital aligns more closely with public mandates.
Beyond the headline figures, this alignment could see PE, VC, and specialized defence funds co-investing alongside sovereign wealth funds and state-backed development banks. Increased deal activity—from minority VC investments in emerging tech and dual-use innovations to robust PE deployments backed by significant dry powder—may drive strategic transactions and industry consolidation.
This confluence of public and private capital not only augments liquidity in the market but also supports longer-term growth and innovation cycles, ultimately influencing deal structures and valuation expectations.
Dual-use technology and industry growth: an emerging M&A hotspot
The defence industry is witnessing strong upward momentum. New startups and growth-stage companies are emerging at an accelerated pace, and traditional players are expanding into larger market to meet rising demand.
Dual-use technologies, which offer solutions applicable to both civilian and military sectors, are particularly attractive. This convergence not only fuels innovation but also creates compelling M&A and investment opportunities. As these firms gain greater attention from both VC and PE, we may well see a surge in deal activity driven by cutting-edge solutions in AI, cybersecurity, satellite communications, and energy resilience.
The robust pipeline of innovation is expected to attract substantial investment, potentially leading to more aggressive deal terms and strategic partnerships.
Reshoring & supply chain security: opportunities and challenges
Europe's push for defence autonomy and local production continues to gain momentum. With incentives such as subsidies and regulatory preferences for European ownership on the table, local supply chain security is becoming a focal point.
While these policies might provide stable, state-supported investment opportunities, they could also introduce new hurdles for international investors trying to adapt to an increasingly protectionist framework. This dual effect might spur further consolidation as investors seek to mitigate supply chain risks by partnering with or acquiring regional players.
Implications for Finnish and Nordic players amid evolving security dynamics
For Finnish and Nordic stakeholders, these developments are especially relevant. Finland's growing defence industry, dynamic cybersecurity sector, and NATO membership position the region as a strategic hub within Europe's evolving security architecture.
Finland's anticipated updates to its FDI screening regime also signal that the regulatory landscape will continue to evolve—requiring innovative deal structuring that harmonizes investor returns with national security imperatives.
The evolving global landscape requires sharp geopolitical, regulatory and financial insight
While the future remains inherently speculative, defence transactions increasingly require sharp geopolitical and regulatory insight alongside financial expertise.
As the industry navigates these uncharted waters, the blend of rising dual-use technologies, a burgeoning startup ecosystem, and enhanced state support may well fuel robust activity across M&A, VC, and PE markets. As capital flows meet strategic investment criteria, we may see both premium valuations and innovative deal structures emerge. At Castrén & Snellman, we are closely tracking these shifts and ready to guide clients through this evolving landscape.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
