Are you a defense company, or a company with defense customers?

Over the past year we have spoken with a wide range of companies connected to the defense market. Some build combat systems. Some build technology that has defense applications. Some have sold into defense for years, but what used to be a modest share of revenue has grown into something material. Companies active in the defense market play the same game, but from very different angles. That is why companies need to think differently about ownership, investors and value when considering growth and the future.

Not one market, but three distinct groups

In rough terms the companies active in the defense market separate into three groups. Two of them are easy to name: core defense and dual-use technology. The third, general industrials, is more opaque but just as important and interesting.

Core defense companies exist to produce defense systems, materiel and solutions, and nothing else. The more established ones produce ammunition and wider combat systems, just to name a few, while a new generation of start-ups build for example counter-UAS and sensor technology. In Finland, the established core defense companies are a small group, a few dozen at most. The good news is that the new generation of start-ups significantly outnumbers them. These start-ups typically have a laser-sharp focus on building an entirely new complete system or a capability designed to be part of a bigger system. For both, the customers are armed forces and selectively primes.

For core defense, the ownership picture is the most constrained of the three. The buyer universe is somewhat narrow, mostly defense primes and other strategic buyers, with limited room for private equity. Which buyer fits depends on the company's offering and where the company sits in the value chain. For core defense start-ups, venture capital is available and active. Foreign direct investment screening, the government review of who may own a sensitive asset, is a real consideration, especially if Finland tightens its regime.

Dual-use companies build technology that serves both defense and civilian markets. Secure connectivity, advanced materials, space-based imaging. In Finland we count these in the low hundreds, but the number is growing. The breadth of the civil and defense market looks like an advantage, and often is. But it forces a decision, for established companies and start-ups alike: how far into defense do you go? Serving two markets sounds like diversification and two routes for growth. However, with limited people and limited capital, it usually means doing neither properly. The companies that create real value are the ones that decide what they are, commit to it and build accordingly.

For a technology company that wants exposure to the sector, dual-use is also the natural way in. For start-ups, venture capital is available, and the investor base is wider than in core defense, because the civilian business keeps the door open to capital that would not touch a pure defense asset. 

The third category is general industrials, the ordinary companies, and it is by far the largest of the three. They manufacture products such as machined components and electronics, or provide services, that many industries buy. One of those industries happens to be defense. There is nothing dual-use about the offering and nothing military about the company. There are hundreds of Finnish companies with meaningful defense exposure, and most of them belong here. As European defense budgets grow, that one customer segment is growing faster than the rest, and in some cases it has quietly become the most valuable part of the business. Defense was never a key part of the strategy for these companies, but it has become an important segment to build future growth on.

For general industrials the capital-provider universe is the widest and the least constrained, largely following the ordinary logic of their core industry. What shapes value from a defense point of view is whether the defense revenue can be separated out and shown to be durable. Recurring, verifiable defense demand is valued differently from the occasional order.

Making the most of a growing market

The defense industry is growing faster than ever. The important thing to remember is that the growth will not benefit the core defense players alone. It reaches the other two categories too.

The question for most companies in the sector is how to make the most of the current boom. For some that means investing in organic growth. Others may pursue bolt-on acquisitions. Some may decide the moment is right to sell. What separates the winners is whether they treat it as a decision or let it happen to them. 

At Atinoma we support owners, management teams and selected counterparties across the full ownership lifecycle. Our work spans sell-side and buy-side M&A, financing and capital raising, as well as early-stage sparring on questions of ownership, funding and strategic direction.

Our role is to help clients weigh alternatives, clarify priorities and focus on the discussions that truly matter.