Cross-Border M&A in Defense & Government Contracting: A Deal Autopsy on Why “Approved” Transactions Still Fail in 2025

Cross-border M&A in defense and government contracting is often treated as a regulatory exercise with a definitive endpoint. Once foreign investment reviews are cleared, export control frameworks are agreed, and closing conditions are satisfied, deal teams frequently assume that execution risk has largely been resolved. In 2025, that assumption is proving increasingly flawed. A growing number of cross-border defense transactions are formally approved yet underperform, stall, or quietly unwind after closing. These failures are rarely driven by demand conditions. Defense budgets remain elevated across the United States, Europe, and allied jurisdictions amid persistent geopolitical instability, accelerated rearmament, and supply chain reshoring. Instead, value erosion occurs because regulatory approval is not the same as acceptance, and legal ownership is not the same as effective control.

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Many of the transactions that struggle post-close appear sound at signing. Buyers acquire technically differentiated contractors with long-term government programs, visible backlog, and high switching costs. Regulatory reviews are completed following lengthy and expensive processes, often supported by detailed mitigation frameworks designed to address national security concerns. On paper, these deals clear every hurdle. Yet post-close performance frequently diverges from underwriting expectations, not because the assets lack quality, but because the operating environment shifts in ways that financial models do not capture.

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The first point of failure is often the distinction between approved control and trusted control. While ownership structures may satisfy formal regulatory requirements, government customers do not always accept the new governance arrangement in practice. Decision-making authority over engineering priorities, subcontractor selection, staffing, and capital allocation may remain technically compliant, yet become informally constrained. Program officers escalate routine matters, contract modifications slow, and new awards quietly fail to materialize. In government contracting, trust is cumulative and fragile. Once uncertainty enters the customer relationship, performance metrics and contractual rights matter less than perception. Regulatory clearance may permit ownership, but it does not guarantee customer confidence.

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A second source of underperformance lies in the operational consequences of mitigation agreements. To secure approval, buyers often agree to proxy boards, special security officers, segregated systems, restricted information flows, and limitations on integration. These measures are frequently summarized as manageable conditions during the transaction process. Post-close, they shape day-to-day operations in ways that are far more restrictive than anticipated. Decision-making slows, accountability becomes diffused, and management teams struggle to navigate overlapping authority structures. What appears neutral in legal documentation can materially impair operational effectiveness once the business is running under mitigation.

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Growth assumptions also tend to unravel after closing. Many cross-border defense acquisitions are underwritten on the premise that capabilities can be scaled across allied markets or adjacent programs. In reality, classified work is rarely portable. Technical data transfers are constrained by law, personnel clearance timelines extend well beyond projections, and program-specific approvals limit replication. Growth optionality that appears compelling in strategic presentations often exists only in theory. In defense, scalability is constrained by regulation and customer discretion rather than ambition or capital availability.

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Human capital dynamics compound these challenges. Defense businesses are built around cleared engineers, program managers, and technical leaders whose value is inseparable from trust, autonomy, and long-term alignment with mission-driven work. Ownership change frequently triggers talent flight, driven by perceived loss of autonomy, increased compliance burden, or uncertainty about future program direction. Replacing cleared personnel is slow, expensive, and uncertain. By the time attrition becomes visible in financial performance, the strategic damage has already occurred.

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Individually, none of these issues is necessarily fatal. Together, they create a compounding effect. Restricted control limits responsiveness, customer confidence erodes, growth assumptions fail to materialize, and talent attrition accelerates. Financial underperformance follows, but only after the underlying strategic position has weakened. At that stage, corrective action is difficult, and exit options are constrained.

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Sophisticated cross-border defense acquirers have adapted their approach in response. In 2025, experienced buyers treat mitigation agreements as operating design parameters rather than legal clean-up items. They engage government customers informally before and after closing to assess acceptance, not just approval. They underwrite downside scenarios in which growth never materializes and focus on protecting base cash flows. They use transaction structure to limit exposure until trust is earned over time. Cross-border advisory plays a central role in aligning deal design with how defense regulators and customers actually behave, rather than how formal processes suggest they should behave.

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Valuation outcomes reflect this shift in discipline. Cross-border defense transactions now trade at a discernible discount to domestic peers, even when backlog quality and margins appear comparable. Buyers price in execution friction created by mitigation agreements, reduced growth optionality, heightened talent retention risk, and program concentration exposure. Sellers often resist this discount until late-stage diligence or customer feedback makes the risk unavoidable. In 2025, valuation is increasingly a function of confidence in continuity rather than optimism about expansion.

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In many cases, alternative structures could materially improve outcomes. Minority or staged acquisitions tied to customer re-acceptance, joint ventures that isolate sensitive programs, earn-outs linked to contract renewals rather than revenue growth, and seller rollovers that preserve government-facing leadership can all reduce irreversible mispricing. Structure cannot eliminate defense-specific risk, but it can prevent buyers from paying for value that cannot legally or practically be realized.

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The broader context reinforces these dynamics. Heightened geopolitical tension, expanded defense budgets, and increased scrutiny of foreign influence have made governments more cautious about who controls defense capabilities. Cross-border defense transactions have not disappeared, but they have become more relationship-driven, slower to execute, and more conditional. Success increasingly depends on credibility and patience rather than speed or scale.

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In 2025, successful cross-border defense M&A requires humility. Buyers must accept that approval does not equal permission to grow. Sellers must recognize that value is inseparable from trust, people, and continuity. Advisors must design transactions around how defense ecosystems function in reality, not how financial models suggest they should function. Cross-border advisory remains essential not to force deals through regulatory gates, but to ensure they still work once the paperwork is complete and the scrutiny begins.