Consolidation Continues in Defense Manufacturing
Merger and acquisition activity is accelerating among small-to-midsize defense contractors. Ajax Defense acquired Bitec to expand its aerospace manufacturing capabilities, while Amca purchased Payne Magnetics to vertically integrate its defense electronics supply chain.
- The Department of Defense is implementing a "Revolutionary FAR Overhaul," initiated by Executive Order 14275 in April 2025, to simplify the Federal Acquisition Regulation. The first wave of changes, through interim "class deviations," took effect on February 1, 2026, with the goal of reducing regulatory burdens that hinder small businesses from competing for federal contracts. - A government-wide initiative called OneGov, announced in April 2025, is centralizing federal procurement, starting with IT software. This strategy shifts the prime contractor role from resellers to Original Equipment Manufacturers (OEMs), requiring small businesses to operate as subcontractors or authorized partners. - The legislative authority for the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs expired on September 30, 2025. As of early February 2026, Congress had not passed a reauthorization, halting new solicitations and awards and creating uncertainty for tech companies seeking R&D funding. - The Department of Defense is advancing its Responsible Artificial Intelligence (RAI) Strategy, which outlines ethical principles for AI use, including responsible, equitable, and governable applications. This framework is intended to build trust and guide the ethical development and deployment of AI capabilities across all military applications. - The DoD is actively using AI in various applications, including Project Maven for analyzing surveillance data, predictive algorithms for optimizing supply chains, and AI-powered drones for autonomous navigation. The department's Joint All-Domain Command and Control (JADC2) system aims to use AI to create a unified network of sensors from all military branches. - Recent acquisition reforms within the National Defense Authorization Act (NDAA) for Fiscal Year 2026 aim to streamline the process by encouraging the use of commercial products and expanding Commercial Solutions Openings to give nontraditional vendors better access. - Private equity firms are increasingly active in the defense sector, acquiring mid-tier suppliers and creating technology platforms for both military and commercial use. This trend is driven by a focus on digital modernization and the acquisition of specialized capabilities in areas like AI and cybersecurity. - Proposed legislation, the Small Business Defense Contract Protection Act, aims to ensure that contracts below the Simplified Acquisition Threshold (currently $350,000) are set aside for small businesses. This comes in response to DoD reports showing that over a quarter of this spending has gone to larger companies.
