Are company mergers having a negative effect on the competition within the defense industry and causing the DoD to waste billions of taxpayers’ dollars? That’s a question some legislators, policy makers, and industry reps are asking. Retired Air Force officer and former strategic planner at General Dynamics, Scott Vadnais, is one of the voices sounding the alarm. He penned an op-ed in the International Business Times this week noting some of the “harmful” mergers affecting the defense industrial base.
As someone who has directly worked for the DoD, as well as a defense contractor, why would he want to arm the DoD with ways to prevent more mergers? Vadnais is among the voices warning that as competition gives way to acquisition, security hangs in the balance.
Secretary of Defense Weighs in
The depth and breadth of the defense industrial base was a topic when Lloyd Austin was nominated for secretary of defense. When asked about significant challenges, he noted [emphasis added], “A number of weaknesses exist in the defense industrial base. They include: workforce stability, financial health, cyber exploitation, a reliance on sole or single-source suppliers, reliance on foreign sources (including adversarial sources), and vulnerabilities to predatory and adversarial capital investments.”
The fewer companies there are to choose from on any given proposal, the more vulnerabilities there are for the Pentagon – whether that’s cyber issues or an inferior end product. A heavy reliance on single-source suppliers or contracts that only have two or three contractors to choose from begin to erode U.S. advancements in things like hypersonic missile technology.
Changing Contract Proposal Dynamics with Mergers
In 2018, Northrop Grumman acquired Orbital ATK for $7.8 billion. Under the merger, the FTC ruled, as a condition for the approval of the merger, the company will have to supply solid rocket motors “on a non-discriminatory basis under specified circumstances.” But then Northrop was able to pick up a $13.3 billion contract for the Ground Based Strategic Deterrent competition. Northrop was the sole bidder for the contract after Boeing dropped out from the competition in July over Northrop’s acquisition of ATK.
Boeing claimed that the acquisition of ATK (now known as Northrop Grumman Innovation Systems), one of the only two U.S. solid rocket motor manufactures, gave the company an unfair advantage in terms of being able to offer the lowest-cost system. Northrop Grumman Innovation System was reticent to sign an agreement that would allow Boeing to work with them while keeping Boeing’s intellectual property away from its rival – meaning Boeing was locked out of competing without the help of the services ATK provides. The FTC continues to investigate this deal.
Key Pending Acquisition
Another acquisition is pending within the defense industry. Lockheed Martin announced their plans in December 2020 to acquire Aerojet Rocketdyne, the last remaining American company that makes solid rocket motors.
Why is this merger such a big deal? Many of the U.S. arms manufacturers have partnered with Aerojet for missile propulsion systems. If Lockheed Martin acquires Aerojet, they will have a competitive advantage locking out the rest of the defense industry from using Aerojet and instead pushing them to look overseas to solicit bids from foreign suppliers just to compete.
The estimated transaction closure is in the second half of 2021. Both the DoD and FTC will have to give approval for the merger. Given the risks of creating another defense industry monopoly and pushing manufacturers into bed with Russia and China to compete, this acquisition joins the list of significant changes and challenges affecting the defense industrial base.