Consolidation among aerospace and defense companies, already a hot topic after a busy 2010, appears to be accelerating due to renewed interest from private equity and expected downward pressure on defense spending.

The first quarter of 2011 saw 17 deals worth at least $50 million, according to a PricewaterhouseCoopers LLP report, compared with 10 transactions of similar size during the same three months of 2010. The deals are also getting bigger: In the first quarter of this year the average transaction was $558 million, easily surpassing the 2010 full-year average of $357 million.

Two megadeals, a €3.15 billion ($5.21 billion) offer by Daimler AG (Milan:DAI.MI) and Rolls-Royce Group plc (LSE:RR.L) to acquire industrial engines maker Tognum AG and Northrop Grumman Corp.'s (NYSE:NOC) $2 billion spinoff of the Huntington Ingalls shipbuilding business, accounted for much of the increase in value. The total number of deals makes 2011 the busiest first quarter for the global A&D sector in at least 30 years, according to PwC aerospace and defense leader Scott Thompson, and is likely a sign of things to come.

Expectations of austerity efforts in both the U.S. and Europe, and the likely decline in spending for big-ticket defense items that will follow, is motivating companies' urge to merge. Large contractors are shifting their focus to areas such as intelligence, surveillance and reconnaissance, unmanned vehicles and cyber-security that are expected to hold up better in the face of budget cuts, and acquiring expertise in those areas to round out their offerings.

"The substantial pick up in deal activity is being motivated by a range of factors and a variety of deal strategies," Thompson said. "We expect this increased pace to continue and to be largely driven by portfolio reshaping among defense contractors and a robust commercial aerospace market, supported by strong liquidity and improving capital markets."

European companies also continue to seek targets in North America in order to build their businesses in the world's largest defense market. During the first quarter Meggitt plc (LSE:MGGT.L) announced plans to buy the Pacific Scientific Aerospace unit of Danaher Corp. (NYSE:DHR) for $685 million, and a unit of European Aeronautic Defence and Space Co. NV (Paris:EAD.PA) said it would buy Vector Aerospace Corp. (Toronto:RNO.TO) for $637 million.

PwC said that deal valuations declined to 1.2 times sales during the recently completed quarter, compared to 1.7 times revenue in 2010 and 1.4 times revenue in 2009. The firm said that valuations could improve as the year goes on as the M&A environment heats up, with commercial aerospace multiples likely to outpace defense valuations.

Private equity buyers, which accounted for just 11.4% of deals in all of 2009, represented 17.6% of activity in the first three months of 2011. Portfolio reshaping by defense giants is creating buyout opportunities for financial buyers, with Veritas Capital, for example, last year buying the Enterprise Integration Group unit of Lockheed Martin Corp. (NYSE:LMT) for $815 million.

Defense bankers also say that the interest among prime contractors in government IT and surveillance capabilities is motivating private equity firms to roll up small targets in the sector in hopes of eventually flipping the newly created entities to a larger firm.