Worldwide aerospace and defense deals have totaled $5 billion so far in 2012, compared with $27.5 billion in all of 2011, when United Technology’s $16.5 billion takeover of Goodrich boosted the total. This year’s total also appears low compared with $6.7 billion in deals in 2010.

The effort by BAE and EADS to create the world’s biggest aerospace and defense group underscored the effect of shrinking markets on big weapons makers. Many other major companies are scrambling to move into adjacent civilian or commercial markets, or find smaller takeover targets to keep revenues growing, bankers and senior industry executives said.

“Second-tier consolidation is much easier because the Defense Department is not against it,” said a banker who requested anonymity, because he is not authorized to speak to the media.

“Had the EADS-BAE deal gone through and created a stronger global entity, clearly it would have increased the likelihood of U.S. consolidation at the prime level,” said the banker. “The chances seem lower in the absence of the deal.”

The U.S. Department of Defense has discouraged mergers among the leading U.S. prime contractors, but has said it is fully expecting takeovers, mergers and other actions among second- and third-tier suppliers, given the expected decline in defense spending in coming years.

A Pentagon official said last month that the department would have to rethink its views on top-tier mergers if Congress is unable to avert another $500 billion massive military spending cuts on top of the $487 billion in cuts already slated for the next decade.

NEW BAE DANCE PARTNER?

Almost all prime U.S. defense contractors considered merging with BAE Systems at various points in the past, and decided against it, several people familiar with the companies’ thinking said.

Most were interested in BAE’s North American operations and they remain wary of adding political risk that would come with being the UK government’s prime contractor by pursuing the whole company, they said.