While defense industry companies are rethinking their strategy to include mergers due to a declining military budget, the Pentagon said it supports mergers—except with the top five defense contractors.

The Pentagon will not approve consolidation of major defense contractors like Lockheed Martin Corp, Boeing, Raytheon, Northrop Grumman or General Dynamics Corp, said Ashton Carter, undersecretary of defense for acquisition, technology and logistics. Carter’s primary concern is maintaining competition and bolstering the Pentagon’s buying power.

The defense department is “down to about five or six very large prime contractors who bid on many, many of our jobs and, in the interest of competition, we are not interested in seeing further consolidation and reduction in that number,” Carter said “But with that exception just about everything else is on the table.” The Pentagon has not yet been approached with any proposals for large-scale mergers, Carter said.

Defense Secretary Robert Gates has targeted $78 billion in cuts through 2016 and another $100 million in efficiencies savings. The dwindling defense budget has created an environment similar to the 1990s, when the lack of spending sparked widespread consolidation in the industry and Lockheed Martin and Northrop Grumman were formed.

Boeing hinted it was open to a large-scale merger last September, but later changed course and said it wasn’t. Lockheed, the largest defense contractor, said it is looking to acquire smaller companies. “We are ambitious and we will continue to look” for acquisitions “but we are not desperate,” said Robert Stevens, Lockheed CEO.

Aerospace and defense industry acquisitions are growing and 2011 should be a big year for acquisitions said Stuart McCutchan, editor of Defense Mergers and Acquisitions. Last year, defense companies of all sizes completed 255 transactions worth $24 billion, the most since 2007, when the industry completed 362 deals valued at $43.4 billion, according to McCutchan.

“This is a policy discussion of what it is we welcome and don’t welcome,” Carter said. “We would like to be part of a dialogue that shapes the kind of change industry undergoes, not as part of a regulatory process.”

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Chandler Harris is a freelance business and technology writer located in Silicon Valley. He has written for numerous publications including Entrepreneur, InformationWeek, San Jose Magazine, Government Technology, Public CIO, AllBusiness.com, U.S. Banker, Digital Communities Magazine, Converge Magazine, Surfer's Journal, Adventure Sports Magazine, ClearanceJobs.com, and the San Jose Business Journal. Chandler is also engaged in helping companies further their content marketing needs through content strategy, optimization and creation, as well as blogging and social media platforms. When he's not writing, Chandler enjoys his beach haunt of Santa Cruz where he rides roller coasters with his son, surfs and bikes across mountain ranges.