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Defense Gets Defensive

"Over the course of the next 12 to 24 months, as new leaders are getting settled in and there is hopefully better guidance from Congress and the administration on spending priorities and the budgets, pressure will build and I think you will see a resumption in carve-outs and other forms of dealmaking," he said.

Some of that carve-out work had already begun prior to the sequestration, most notably Northrop Grumman Corp.'s (NOC - Get Report) 2008 spinoff of shipbuilder Huntington Ingalls Industries Inc., but Rogers said there is plenty more work to be done. "If you are fourth of four in an area it might make sense to carve that out and focus on what you are good at," he said.

Among more traditional armament categories, industry watchers point to ground and tactical systems, a segment that is very fragmented and where there is significant innovation coming from small to midsized companies, as an area that appears ripe for dealmaking.

PwC's Thompson expects defense companies to increasingly look to adjacent markets outside of defense for new growth opportunities. Government contractors have a mixed history of success trying to expand commercial businesses, but Thompson points to industries including energy and healthcare, where some of the companies' research into security and data processing can easily be applied without overreaching.

Hewson, Lockheed Martin's CEO, during her company's recent earnings call talked about the massive amount of R&D Lockheed does in a range of topics and said she believes some of that research could be applied to the private sector. "As a company, we're a technology leader," she said. "We often talk about saying that we do hard stuff, we do difficult things and try to work on big things that are affecting the global environment -- the global security environment."

Security is an area of obvious concern not just for the Pentagon but for corporate America, and a natural avenue for defense contractors seeking to open new fronts away from future sequestration headaches.

Given the anxiety defense companies have experienced in recent quarters watching politicians bicker, buying some exposure to those new markets might seem the best path forward.

-- Written by Lou Whiteman in New York.

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