Three months ago, U.S. tank maker General Dynamics (NYSE:GD) announced its intention to purchase British armored vehicle manufacturer Alvis for the princely sum of 280 pence per share, totaling roughly $550 million. At the time, I called General Dynamics' move brilliant, but pointed out that the purchase faced two major obstacles: the need to clear the buyout with British and European Union regulators, and the possibility of a counteroffer from Britain's BAE Systems (AMEX:BAE).

Well, no sooner had General Dynamics cleared the first hurdle than it was tripped up by the second. BAE announced on Thursday that it had no intention of allowing General Dynamics to invade its home turf unopposed, and it launched a massive counterattack that raised General Dynamics' per-share offer by 14%. BAE offered 320 pence, or more than $650 million, to purchase the 71% of Alvis that it does not already own, and Alvis' management is recommending that shareholders take the money and run.

Disappointing news to General Dynamics, which has already affirmed that it will not increase its original offer and, thus, is abandoning its takeover bid. But also disappointing news to some BAE shareholders, who worry that their company has seriously overbid for Alvis. They're not the only ones, either. Moody's (NYSE:MCO) is already reviewing BAE's debt rating for a possible downgrade based on the purchase price. And while Alvis' stock jumped 14% on BAE's offer, BAE's stock price slumped about 0.7%.

Meanwhile, back in the States, General Dynamics' stock price rose nearly 1% on the news. Investors have to be cheered by that, even if the loss of Alvis came as bitter news. At the same time, now we need to consider whether General Dynamics will go on the hunt for local acquisitions.

The company has nearly $900 million cash in its war chest, and is a powerful free cash flow machine, pumping out more than $1.5 billion in cash every year. Smaller defense-contracting rival Raytheon (NYSE:RTN) has been named as one possible target. But you have to wonder if, given General Dynamics' remarkable ability to predict the future of the military's needs and buy companies positioned to fill those needs, an acquisition of one of the body and vehicle armor companies, such as Ceradyne (NASDAQ:CRDN), DHB (AMEX:DHB), or Armor Holdings (NYSE:AH), might be an even better fit.

Care to discuss a new suitor for General Dynamics? Head on over to the Aerospace and Defense discussion board.

Fool contributor Rich Smith has no ownership interest in any of the companies mentioned in this article (but he thinks their products are way cool).