Sharing recent market insights from Tom Peltier, Managing Director at Progress Partners, on the state of Federal Technology M&A.
2025 Was A Difficult Year for Federal Technology Services Contractors
The Federal Technology Services sector experienced significant headwinds in 2025 starting with DOGE followed by the record 43-day government shutdown. The prevailing sentiment in the “traditional” GovCon sector—particularly companies without proprietary IP in AI, space, autonomous systems, cyber—was that “any growth in 2025 is a miracle” to quote a longtime PE GovCon investor.
While contract awards regained momentum in the fall months, most technology focused and professional services government contractors were seeing revenues pushed out 12, even 18 months, and this was especially the case for civilian agency focused contractors, which also saw many contracts terminated or downsized significantly. Added to this were the downsizing of acquisition staff at many agencies, creating substantial bottle-necks in awards and contract negotiations. This created a very difficult environment for M&A for both sellers and buyers: (1) revenues and EBITDA not growing and even declining despite having the contracts and possibly new awards, (2) multiple compression of 1-2 turns as buyers saw the market weakness and demanded discounts, and (3) unfavorable deal structures reflecting buyer concerns about future revenue viability and trying to force more of the risk back onto the sellers through earnouts, larger escrows and more seller equity rollover. Despite these headwinds, it is worth noting that the hotspots in Federal Technology M&A – AI, space, autonomous systems, cyber – continued to flourish, with National Security being the prevailing customer set.
Market Dislocation Followed by a Strong Recovery
This market dislocation for the traditional federal technology services contractors significantly reduced M&A activity earlier in 2025 and we are only recently seeing a resurgence in Q4 2024. For Q4, we saw 22 pure-play Federal Technology Services M&A transactions close, and all were focused on National Security (in our M&A deal counts, we do not count companies where the federal government is the not the primary customer and only those companies that deliver services and solutions and not solutions that represent broad weapon-system-type platforms). This deal count is up from 14 Federal Technology deals in Q2 and 19 in Q3. The average Federal Technology deal counts on a quarterly basis since COVID is approximately 25 to 32 with a mean of 27-28 deals.
A Strong Outlook Heading into 2026
As we enter 2026, the environment could not be more bullish for Federal Technology Services companies focused on the National Security sector. DOGE has been disbanded and discredited with their minimal impact on spending reduction combined with tremendous disruption. The government shutdown ended with both parties chagrined.
On the fiscal side, the National Security spending ramp is awe-inspiring. The 2026 National Defense Authorization Act (NDAA) calls for base Defense spending of $915B, which is a 4.2% increase above record FY 2025 Defense spending, but added to this is $156B investment from the Trump Administration’s One Big Beautiful Bill Act (OBBBA) focused on Defense modernization and border security. Combined, we are looking at a Defense Budget that will exceed $1T for the first time. New Defense programs like the $175B Golden Dome (now known as the Scalable Homeland Innovative Enterprise Layered Defense or “SHIELD”) as well as increasing Defense spending among NATO allies provides for more Defense opportunities throughout the sector.
How quickly things change and M&A activity has reflected this new environment. Since the beginning of December through mid January, we have seen 19 Federal Technology Services transaction announcements, which exceeds deal announcements in all of Q2 and equals Q3. At this pace, 2026 will most likely be another record year for Federal Technology Services M&A, with pent-up deal flow from 2025 flowing into 2026 and buoyed by nearly $1.5T in US and European Defense spending and technology investment driven by AI, space, autonomous systems, cyber, IT modernization, health IT, quantum computing, etc. The focus remains on National Security but it is only a matter of time before Civilian Agency technology contractors also see a recovery as Trump Administration threats to their revenue streams wanes.
October 24, 2025