Defense's Next Wave Is for the Little GuysBy Joel Litman, chief investment officer, Altimetry
 In 1993, the Pentagon gathered executives from America's biggest defense contractors for a dinner that became known as the 'Last Supper'...
The meeting's message was simple: The Cold War was over, defense budgets were falling, and the government did not expect the existing defense industrial base to survive intact. The executives took the hint. If the government wasn't going to sustain them all, the only path forward was to combine. The mergers and acquisitions (M&A) started shortly after... Lockheed and Martin Marietta combined to form Lockheed Martin (LMT). Northrop bought Grumman to create Northrop Grumman (NOC). Boeing (BA) later absorbed McDonnell Douglas. Across the 1990s, more than 50 defense suppliers ultimately consolidated into five major contractors. Shrinking budgets reinforced the trend. By fiscal 1998, the real Department of Defense budget was roughly 40% below its 1985 peak. With the big defense companies getting bigger through M&A, that left little room for the companies further down the chain. Today, we'll explain why that pattern is changing and why investors are now moving to the smaller end of defense. Carlyle (CG) has spent nearly three decades investing in aerospace and defense...Historically, it worked with larger companies in the industry. For example, back in 1997, it acquired United Defense Industries, the maker of the Bradley Fighting Vehicle, for $850 million. Now, it's pivoting toward the smaller businesses left behind in the wave of consolidation. In May, Carlyle launched a fund aimed at developing smaller defense companies. It followed that move by acquiring military-encryption company Secturion Systems in July. A month later, Carlyle helped lead a $1 billion funding round for missile startup Castelion. Over the past six months, the number of aerospace and defense M&A deals has jumped 140%. At the same time, the average deal size has fallen 60%.
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That says activity is spreading to the smaller part of the defense market. More companies are changing hands, even as the typical transaction gets much smaller. For decades, defense M&A was defined by the aggregate moves made to create today's defense giants. This time, the trend is developing from the bottom up as small and mid-sized defense businesses are becoming much more active in the market. Washington is helping push this forward... The defense budget is supporting greater participation from small defense businesses. Programs in AI, cybersecurity, drone warfare, and missile defense are opening doors for smaller firms that can move faster than legacy giants. And clearly, Wall Street agrees. With more defense M&A and a surge in investment funds for these small defense companies, this part of the industry is in high demand. The biggest contractors will have more competition...The large defense giants remain central to the industry. They have huge manufacturing footprints and balance sheets that can manage long-term contracts. We'd never count them out. That said, we don't want to ignore where Wall Street activity is moving. A 140% increase in transaction count alongside a 60% drop in average deal size shows where a growing share of activity is happening. That means, for the first time in decades, the defense search can widen beyond the giants. Smaller-cap defense names are often more nimble and singularly focused on the emerging capabilities that private investors want exposure to. As those companies start to get more funding and attention for M&A, they'll be better equipped to scale quickly. The status quo in defense is changing, and the smaller companies have the most to gain. Regards, Joel Litman
September 23, 2026 P.S. And these tiny suppliers have the potential to make huge stock moves... That's because America needs to rebuild its military. And as trillions of dollars flow into traditional weapons and new defense technology, the household-name defense companies aren't the ones that will be transformed by this wave of spending... the smaller ones are. In just a few weeks, a major event is happening that will determine where this money will start to go. Click here to learn more.
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