Government Contracting & Defense Services M&A

M&A activity snapshot

Government services M&A had its weakest year in recent memory in 2025. KPMG Corporate Finance counted 125 government services deals in 2025, down 28.2% from 174 in 2024, while aerospace and defense/C5ISR deal counts rose. KPMG attributes the drop mainly to April and May 2025, "the height of DOGE," agency dissolution, and procurement uncertainty.

The pause was short. Capstone Partners reports that government contracting M&A saw an "acute pullback" in 2025 and that Q1 2026 restored M&A to stable levels of growth. Acquirers shifted toward targets with revenue across federal and state, local and education (SLED) customers.

The longer trend is consolidation by private capital. Government services deal counts ran about 100 a year for a decade, then hit about 180 in 2021, driven largely by private equity. An academic study found that private equity firms acquired over 1,500 defense contractors from 2000 to 2022 and in recent years accounted for over 40 percent of annual U.S. defense-industry M&A.

Large deals set the price reference points. Carlyle took ManTech private at an enterprise value of about $4.2 billion in 2022, and Veritas Capital agreed to buy Perspecta for $7.1 billion in cash in 2021, combining it with Peraton.

Who is buying

PE-backed platforms. Private equity drove 68% of 2024 government IT services deals: 22.9% as new platforms and 45.0% as bolt-ons. The number of PE-backed government services platforms reached 146 by mid-2025, even though only 10 new platforms formed in H1 2025, against 27 a year earlier. Those platforms need add-ons, which is why bolt-ons rose to 27 in H2 2025 from 25 a year earlier while every other buyer category shrank.

Public strategics. Large primes buy capability and customer access they cannot build fast enough. KPMG lists 2024 strategic deals by CACI (Applied Insight, Azure Summit), Parsons (BlackSignal), CGI (Aeyon) and KBR (LinQuest), and 2025 deals by Parsons (TRS Group) and Leidos (Kudu Dynamics).

Sponsor-to-sponsor buyers. Funds sell to other funds when public markets are shut. 2025 exits included MetroStar to Veritas Capital after 1.7 years and SilverEdge to SAIC after 3.8 years. Hold periods are lengthening: the average PE platform hold rose from 4.3 to 5.1 years between 2023 and 2024.

Independent sponsors and search funds are also active below platform scale, though no public dataset tracks their GovCon deal share separately.

What buyers look for

Cleared workforce. Clearances take months to obtain and cannot be bought on the open market, so a cleared staff is the asset. When Parsons bought CTI, its release noted that 87 percent of CTI's 225+ employees hold security clearances.

Mission alignment with the budget. Buyers favor defense, intelligence and homeland security revenue. The FY2027 budget request seeks $1.5 trillion for defense, up 42%, while cutting nondefense spending by $73 billion, or 10%.

Termination-for-convenience exposure. DOGE made this a diligence line item. GAO found DOGE reported more than $61 billion in savings tied to 13,476 contracts it said were terminated, though GAO also found some of those savings estimates incorrect or unsupported. Buyers now ask which contracts were reviewed, cut or descoped in 2025.

Contract position. Prime contracts on multi-year vehicles beat subcontracts. Full-and-open or unrestricted awards beat small-business set-asides, because size and program status must be recertified within 30 calendar days of a change in control.

What makes a strong company

A government services business that prices at the top of the range typically has:

• EBITDA margins at or above 10%. The median CY2026 EBITDA margin across eight public government services companies was 10.2%, and Parsons screens acquisitions for adjusted EBITDA margins of at least 10%.
• A high share of cleared staff, and no reliance on one or two people for customer relationships.
• Prime positions on contracts or vehicles with years of remaining period of performance.
• Revenue from more than one agency, and no single task order large enough to sink the business at recompete.
• Technical capability (cyber, space, signals intelligence, software) rather than labor hours alone.
• Small-business set-aside revenue that is a minority of backlog, or a clear plan for how it rolls off after a sale.

Valuation and deal structure

Public comps set the ceiling. Eight public government services companies traded at a median 10.6x CY2026 estimated EBITDA and 1.14x revenue at 12/31/2025, from 7.9x for V2X to 13.2x for CACI. Capstone Partners' broader aerospace and defense set averaged 11.4x EV/EBITDA in 2025 and 9.5x in Q1 2026; that set includes hardware makers, so treat it as a proxy rather than a services benchmark.

Disclosed private deals cluster near public multiples for differentiated targets. Parsons paid $89 million for CTI, about 10x its estimated 2026 adjusted EBITDA. KBR agreed to pay $737 million for LinQuest, which expected $500 million to $550 million of 2024 revenue, or roughly 1.3x-1.5x revenue by Axia's arithmetic.

Structure matters as much as the headline number:

• Stock versus asset deals. A stock purchase with no change in the contracting entity needs no novation agreement. An asset purchase requires the government to recognize the buyer as successor contract by contract.
• Tax step-ups. Buyers who can structure for a step-up pay for it. CACI's $1.275 billion purchase of Azure Summit carried a tax benefit with a present value of $194 million, for an effective price of $1.08 billion.
• Recompete and set-aside risk. Earnouts and escrows are commonly tied to recompete outcomes or to backlog that may be lost after recertification. KPMG and KippsDeSanto do not publish earnout frequency for the sector, so this is a general deal pattern, not a sourced statistic.

This is market data, not a valuation of any specific business. To get a starting range for your own company, use the valuation tool.

Subindustries

GovCon buyers price each service line differently. Cleared software and cyber work trades at the top of the range, while labor-heavy staffing and base support trade at the bottom. Each page below covers its own buyers, rules and benchmarks.

Outlook

Expect defense-aligned services to lead the next 12-24 months. Funding growth is concentrated there: the FY2027 request adds $445 billion to the defense topline, though Congress has not yet enacted it. Civilian-agency contractors face a tighter market and more buyer scrutiny of contract terminations.

Procurement rules are also changing. The FAR overhaul, led by OFPP and the FAR Council, aims to rewrite the FAR in plain language and remove most non-statutory rules. Buyers will diligence how targets adapt to new clauses on recompetes. Set-aside programs remain large: small businesses won 28.76% of eligible federal contract dollars in FY2024, against a 23% goal. So the size-status question will keep shaping who can buy which companies.

With 146 PE-backed government services platforms in the market and only 3 PE exits in H2 2025, sponsors carry aging portfolios and pent-up add-on demand. That favors owners with cleared, defense-aligned businesses that can be sold as add-ons.

Own a government services business and want a starting point before talking to buyers? Run the valuation tool. For how buyers build target lists in a niche like GovCon, see why vertical-specific buyers outperform generalists and how PE firms build buy-side pipelines.