Russia’s invasion of Ukraine in February 2022 didn’t just redraw Europe’s security map—it pulled Germany’s law firms into the center of a newly politicized defense economy. "With the invasion of Ukraine, all law firms—like the entire economy—have really awakened to the issues of defense, aerospace, and cybersecurity," said Florian Becker, a corporate and M&A partner at Munich-headquartered Noerr. Germany’s three-year defense surge has opened major opportunities for law firms, but the rules are set by politicians, national security experts, and regulators rather than market demand. Deals are tightly controlled, highly selective, and rarely open-ended, with legal advisers doing a lot of preparatory advice long before a transaction takes shape. Even the definition of “defense" has grown far beyond traditional boundaries. The sector now includes cybersecurity, space and satellite technology, AI-supported systems, drones and critical infrastructure. The expansion has reshaped legal advice, which today reaches well beyond classic due diligence into export controls, security clearance regimes, procurement law and the conversion of civilian production facilities. Stephan Waldhausen, an M&A partner at Freshfields, is seeing “fewer but very complex deals” with the traditional primes—leading defense companies that serve as main contractors for major military projects—but “with tech, drones, cyber and private capital, the number is increasing much more significantly.” Over the next 12 years, Germany alone plans to invest €500 billion ($584 billion) in military spending from the Sondervermögen, a credit-financed fund to pay for major priorities such as defense, infrastructure and climate action. But that's just the start. Chancellor Friedrich Merz said government funds would be best used if they leveraged private investment in Germany, “at least at a ratio of one to five, preferably one to 10.” Complex Deals, Selective Growth Despite the large sums, transaction activity remains uneven in Germany. Stefan Widder, an M&A partner at Gleiss Lutz, expects to see a sudden, exponentially rising deal curve: “We are currently doing a lot of preparatory advice—but the ‘hockey stick’ will come, mainly because private equity is sitting on enormous dry powder.” Deal flow is concentrated in specific segments right now. Freshfields, for example, regularly advise Airbus’s defense division and recently assisted Leonardo in signing a memorandum of understanding with Thales and Airbus to create large European satellite group, the relevant divisions and subsidiaries are to be merged. Speed remains a constraint in classic defense deals. “These are not fast-moving transactions. They are highly complex and proceed at a much slower pace to closing than in other industries,” Christian Schwandtner, an M&A partner at Hengeler Mueller, said. Hengeler advised Hensoldt and its owner KKR on its IPO on the Frankfurt Stock Exchange (Prime Standard) and regularly advise Rheinmetall on antitrust matters, in particular on the formation of strategic joint ventures. Joint Ventures Over Consolidation Although widely seen as necessary, national interests frequently block cross-border mergers, making structural consolidation in the European defense sector difficult. “This conflicting objective is often resolved through cooperations or joint ventures,” Waldhausen said. Such structures allow companies to share technology without transferring ownership but raise difficult questions. “What IP is brought in, who has which rights regarding IP that is being created, who owns it and how to get the first government order—these are crucial deal questions,” he said. At the same time, new investor groups are entering the market. “Activity has increased significantly—family offices and other players who previously had no interest in the industry are suddenly showing interest,” Schwandtner said. Private-equity investors are also exploring opportunities, but often underestimate the constraints imposed by regulation, political oversight and limited exit routes. As a result, legal advisers don´t just advise on deals, they also act as guides between corporate and government interests. “We have already advised sellers not to consider certain investors in the first place, even if there was a lucrative offer—it is better to choose the safe option that is also approvable,” said Bärbel Sachs, head of international trade at Noerr. “With sensitive deals, you have to work with educated guesses—you have to know what might be a sticking point for the ministry.” The $6 billion carve-out and IPO of Thyssenkrupp’s naval shipbuilding unit TKMS is one such example. While the federal government refrained from taking a direct stake, it secured extensive pre-emption and approval rights. “The federal government can prohibit any deal. In effect, this is a real poison pill for investors that think about a takeover,” Becker said. Opportunity Shift “The real action is more likely to be among second-tier suppliers—drones, AI, unmanned vehicles—which are less capital-intensive and easier to broker,” Gleis Lutz partner Widder said. The firm recently advised Porsche Automobil Holding SE on its investment in drone manufacturer Quantum-Systems. Entry into the sector has lasting consequences. Entire companies can be affected by defense issues and subsequent sales may be more difficult due to the high level of regulation. “Defense deals are among the few where regulation drives not only risk, but the entire strategy,” said Christoph Goller, a private equity partner at Gleiss Lutz, noting that while politicians aim to simplify many processes, stricter rules on weapons of war and confidentiality are enforced as the security situation becomes more precarious. Startups, Innovation—and Limits to Scale Venture capital interest in defense technology is rising as well, fueled by rapid innovation linked to the war in Ukraine. “This is attracting further start-ups, primes and, to an increasing extent, private capital,” Waldhausen said. Yet scalability remains uncertain. “Many defense start-ups and their investors underestimate how much, for instance, export controls could limit scalability,” said Hengeler partner Clemens Höhn. AI and defense may be the talk of the town in the realm of venture capital, “but the business plan of a defense startup is exposed to completely different risks than those of other startups", he said.