In the consumer world, it is getting increasingly difficult to know who actually owns your cable company, internet provider, or mobile phone carrier. In recent years, AT&T bought and then subsequently spun off DirecTV, while it sold Warner Bros. (including HBO) to Discovery. Likewise, anyone who had a mobile phone contract with Sprint is now a T-Mobile customer. The defense and aerospace sector has seen even more merger and acquisitions in recent years. This has included such companies as General Dynamics, Northrop Grumman and Orbital ATK, and Lockheed Martin and Sikorsky.

In 2015, then-Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall warned that the trend toward fewer and larger prime contractors had the potential to impact innovation and limit the supply base. Kendall told National Defense at the time that it could also pose entry barriers to small, medium, and large businesses, which would ultimately reduce competition.

Earlier this year, the DoD announced that it would support the Federal Trade Commission (FTC) and DOJ in antitrust investigations. The Pentagon has further sought to strengthen oversight of industry mergers amid the concerns that all of this corporate consolation is in fact undermining U.S. competitiveness.

“DoD faces a historically consolidated defense industrial base, making heightened review of any further mergers and acquisitions necessary,” stated the DoD report that was released on Feb. 15 of this year. “When markets are competitive, the Department reaps the benefits through improved cost, schedule and performance.”

High-Profile Acquisitions This Past Year

While some acquisitions and mergers make it through the process, not everyone does. Just recently, QinetiQ announced that it has entered into an agreement with Avantus. The deal is slated to close before the end of the calendar year. And back in 2021, Peraton moved up in the defense contracting world with their key acquisition of Perspecta. Around that same time, Peraton also purchased Northrop Grumman’s IT business.

So, not all acquisitions and mergers are views poorly by the federal government. In fact, the list of successful acquisitions would more than likely, far outweigh the ones that don’t make the cut. So, what makes some stand out more than others?

Increasing Competition

When it comes to what doesn’t make it past the federal government’s watch, innovation or competition concerns are a key driver in the level of resistance defense contractors meet. And of course, resistance makes a lot more waves than smooth sails. Lockheed Martin and Aerojet Rocketdyne found this to be the case in 2020 when their merger was announced. The knee-jerk reaction to the deal was that it would give one leader in the defense industry a dominant position over solid fuel rocket motors – which are a vital piece of the U.S. missile industry.

Lockheed Martin terminated its efforts to acquire the rocket engine maker after the FTC had announced in January that it had voted unanimously to sue to block the deal over antitrust concerns.

The company’s Chief Executive James Taiclet said in a statement that the acquisition would have improved efficiency, speed, and cut costs for the U.S. government, but then added that terminating the agreement was in its stakeholders’ best interest.

Booz Allen and EverWatch had similar issues with their acquisition plans, due to the competition field on an impending National Security Agency (NSA) contract.

The DOJ filed its antitrust lawsuit with the Maryland District Court at the end of June to block Booz Allen Hamilton’s “definitive agreement” to acquire its competitor. Booz Allen and EverWatch were the only companies to indicate intent to bid as prime contractors for the NSA’s upcoming RFP (Request For Proposal) to provide operational modeling services in support of NSA’s signals intelligence mission.

In a statement from Booz Allen, they shared, “We continue to believe the transaction would deliver significant benefits to our government clients in an industry that is highly competitive.”

Upon Further Review

Recently, Politico reported that the FTC is reviewing the Northrop Grumman/Orbital ATK acquisition from 2018. Some experts have suggested that this would be the most aggressive anti-trust action yet, but any pushback on a prior deal would signal that the commission is committed to pursuing enforcement even after deals have already been completed – regardless of the outcome of the review.

“The lawsuit would create significant uncertainty in the mergers and acquisitions process, though it is unclear whether the FTC has the ability to fully wind back the agreement even if a court decides that Northrop has violated the terms of its original deal,” warned William Davies, defense associate analyst at international analytics firm GlobalData.

CEO Kathy Warden shared on a July 28 earnings call that, “over the past four years, we’ve executed an extensive compliance program and worked with the government very closely in line with the terms of the order.”

Cost Vs. Competition

Acquisitions and mergers pit two ideas against one another – saving costs and increasing competition. While it could be cheaper for the federal government to have less players in the ecosystem, as each contractor adds on additional overhead rates, less competition can reduce the government’s ability to select a bidder with cheaper costs. However, more players in the field doesn’t necessarily drive down costs and increase competition at the same time. The federal government’s love of lowest price technically acceptable bids is hard on innovation.

When it comes to reducing costs or increasing innovation through more competition, the federal government needs to do more than question mergers and acquisitions. We need a hard look at the overall defense contracting system to find better ways to bring about better technology and innovation without all the scrutiny of mergers and acquisitions.

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Peter Suciu is a freelance writer who covers business technology and cyber security. He currently lives in Michigan and can be reached at petersuciu@gmail.com. You can follow him on Twitter: @PeterSuciu.