Command, Control, Communications, Computers, Intelligence, Surveillance  and Reconnaissance (known as C4ISR for short) serves as a key component in providing new space technology and highly skilled services for the development of the U.S. Space Force (USSF). Capstone Headwaters managing director Tess Oxenstierna spoke to Mergers & Acquisitions about dealmaking in the sector. Oxenstierna is one of the Most Influential Women in Mid-Market M&A.

What Do Private Equity Investors Need to Know About C4ISR?

C4ISR serves as primary “enabling technologies” across military air/land/sea/space platforms and the joint networks that allow for interoperability across these mission critical systems. Last fall, the Department of Defense (DOD) released its first enterprise data strategy, with its top priority focused on how to harness multi-sensor data for joint all-domain operations. The Pentagon’s strategy outlines the principles, capabilities and goals needed for DOD to become a “data-centric organization.” Underpinning this strategy is a robust C4ISR network.

Something important for investors to know is that because these technologies were deemed essential, that helped mitigate business loses for the defense industry. Also, despite a slow Q2 and Q3, deal volume in 2020 kept pace with 2019 activity. The sector’s robust nature due to steady U.S. defense appropriations, roughly at $740 billion, has been fundamental to investors’ continued interest.

Tess Oxenstierna


How Does C4ISR Fit Into the Aerospace, Defense and Space Sector?

Apart from the enabling technology for domain platforms, the C4ISR industry serves as a key component in providing new space technology and highly skilled services for the development of the U.S. Space Force (USSF), established in 2019, making it the sixth branch of the Armed Forces and the first branch to be created since 1947.

The Pentagon requested an $18 billion Space domain budget for fiscal year 2021. This included the USSF’s first budget as a separate military service, $249 million for U.S. Space Command, and $337 million for a Space Development Agency.  In August 2020, The Space Development Agency awarded its first major contracts to create a low-Earth orbit constellation of satellites that will be used to support the military’s command, control, and communication systems. This new focus on space innovation simply results in new opportunities for organizations to deploy new growth strategies to secure government contracts and provide needed services.

How Has the Defense Sector Been Affected by the Pandemic?

The defense industry was not impacted as severely as the pure-play commercial aerospace and aviation markets, as the U.S. government continued to execute on military programs, whether in the research and development stage or already fielded weapon or intelligence systems. What may be looming are flat defense budgets during the Biden Administration, driven by the need to pay for discretionary government-funded relief programs stemming from the pandemic crisis.

Looking back, however, the March 2020 Defense Production Act did boost the sector by authorizing federal government loans and prioritizing government orders to ensure continuity of supply. Still, C4ISR companies haven’t entirely recovered from the pandemic’s impact whether measured by valuation metrics, top-line revenue growth, or margin expansion, but they are improving at a faster clip than other sectors in the broader markets.

Tell Us About the M&A Trends in the Sector.

Merger and acquisition activity through 2020 has been strong with 60+ transactions and has marginally outpaced the year-to-date volume for 2017, 2018, and 2019, respectively. Despite the slowdown in M&A activity in Q2 and Q3, transactions volume has demonstrated a recovery entering Q4 with October deal count outpacing year-over-year levels. Because private equity firms are seeking a safer return on investment in the changing market, PE firms have become more acquisitive. Corporates, whether public or private, remain active investors, as we note continuing consolidation in government contracting services, federal IT, cybersecurity and certainly the space domain sector.

What Type of Investors is the C4ISR Sector Attracting?

The sector is attracting private equity, family offices and corporate investors alike. As the U.S. has been pivoting towards the Indo-Pacific region preparing for fighting with near peers (Russia, China) vs. non-state actors (terrorists), the demand for hypersonic weapons, surface ships, unmanned systems, and fused intelligence systems has grown, especially in contested environments. The defense sector is also attracting investors in areas such as artificial intelligence/machine learning, 5G, quantum communication, autonomous unmanned systems and Internet of Things – all of which has the added benefit of dual-use growth in the commercial market.

What Other Trends Do You See in the Sector?

The release of the Pentagon’s data strategy comes after the U.S. Army and Air Force tested their ability to connect sensors and shooters across domains, a concept known as Joint All-Domain Command and Control (JADC2), a major initiative across the military services. 

In addition, another trend is space innovation in small/nanosatellites, low Earth orbit (LEO) technology, and enhanced space-based communications systems. This defense sector overall has been heavily driven by the shifting warfighting readiness and modernization requirement of the DOD, as the implementation of the current national defense strategy continues.

For more, watch our video interview with Oxenstierna, conducted at M&A’s Most Influential Women Speak virtual event.