Companies looking to acquire other businesses are mainly interested in obtaining high technology capabilities, with artificial intelligence (AI) high on the list, according to a report by the private equity firm Capstone Headwaters.

Mergers and acquisition (M&A) “activity has largely been driven by technology and intelligence, with buyers expanding capabilities in software, data analytics, and predictive intelligence,” Capstone says in its second quarter 2019 C4ISR M&A Coverage Report. “Modern technology is key to effectively synchronizing complex intelligence data between air, land, sea, space, and cyber to rapidly communicate with forces around the world and mobilize a successful response team.”

The report also says that “AI has rapidly emerged as a key technology target,” highlighting that the global market for AI within the aerospace and defense industry is expected to grow more than 14 percent compounded annually to $17.6 billion by 2025.

President Trump’s proposed defense budget for fiscal year 2020 contains the largest funding for research and development in 70 years, the report says, with a focus on modernization with “critical enabling technologies” versus “regional conflicts or counterinsurgencies.”

This is putting a “premium” on “differentiated C4ISR capabilities” in M&A, Capstone says, noting that in 2018 11 percent of deals that closed were “pure C4ISR.”

“The increase in drone operations tempo, investments in strategic and in-theater intelligence gathering platforms, and the national priority place on missile defense, are driving heightened valuations,” the report says.

So far in 2019, there have been 44 M&A deals that were announced or closed, just two less than in the same year to date period for 2018, Capstone says.

The report highlights the pending $91 billion acquisition of Raytheon [RTN] by United Technologies Corp. [UTX], adding that, “The companies’ ability to leverage each other’s research and development resources well positions the combination to further dominate share of DoD funding for C4ISR.”