The Biden administration is facing two early tests in the area of corporate mergers and acquisitions. Depending on who is doing the talking, the ongoing review of Lockheed Martin’s proposed purchase of Aerojet Rocketdyne is either critical for strengthening or catastrophic to the health of the defense-industrial base.
In the Senate, meanwhile, there are efforts underway to punish “big tech” through legislative changes to how antitrust reviews are conducted. Will the administration adopt a more aggressive approach toward corporate transactions favored by its progressive wing, or will it continue the policy of recent Democratic and Republican administrations, which preferred not to intervene in business transactions, absent a strong imperative to maintain competition?
My experience overseeing M&A reviews by the Department of Defense during the Obama and Trump administrations leads me to the conclusion that “steady as she goes” is the best course of action. This view is by no means a reflexive bureaucratic response, but rather derives from direct involvement in a large number of reviews involving small, mid-tier and large companies. Two transactions in particular point the way for the new administration to ensure that we maintain vibrant competition across the defense-industrial base without distorting the marketplace with unnecessary government intervention.
Mergers and acquisitions are central contributors to the health of the aerospace and defense market, just as they are in other industry verticals. All M&A transactions are governed by the Hart-Scott-Rodino Act; the HSR requires reviews to determine whether a specific transaction negatively impacts competition. The DoD plays a central role in defense-related reviews.
In 2011, then-Under Secretary of Defense for Acquisition, Technology, and Logistics Dr. Ash Carter articulated the only recent declarative DoD policy toward M&A when he stated that the DoD was “not interested in seeing further consolidation” among the largest five or six prime contractors. This posture has frankly guided Democratic and Republican administrations since the blocked 1997-1998 attempt to merge Lockheed Martin and Northrop Grumman.
This, however, has hardly been a “greenlight” for unrestricted consolidation below the very top level. The DoD closely analyzes each transaction, from the companies involved to affected programs across the DoD as well as the transaction’s impact on competitors. Mergers are cleared, denied or approved with conditions (e.g., divestitures in airborne radios, military GPS, and electro-optical/infrared sensors were required for approval of the 2019 merger between Raytheon and United Technologies Corporation).
In 2017, for example, Ultra Electronics attempted to purchase Sparton. These two companies are the only two domestic manufacturers of sonobuoys, which are sonar systems used for anti-submarine warfare. Chronically mediocre demand since the end of the Cold War and a long-running joint venture between the companies had led to a situation where neither company could independently produce several classes of sonobuoys. The Department of Justice, working with the DoD, made it clear that it would block this transaction because it essentially eliminated competition; so the parties eventually abandoned the transaction in 2018. More importantly, the DoD promptly began the work of rebuilding domestic sonobuoy capacity by dismantling the unhealthy joint venture and investing in projects such as Title III of the Defense Production Act.
The sonobuoy case shows the power and effectiveness of the HSR regime as well as the ability of the department to provide better industrial base incentives. This case also shines light on current legislative measures in play on Capitol Hill. For different reasons, Sens. Amy Klobuchar, D-Minn., and Josh Hawley, R-Mo., have drafted bills to adjust HSR authorization language to address concerns about big technology companies such as Facebook and Google. These new bills, however, are counterproductive because they will muddy the HSR process when there are clear alternatives (most notably Section 230 of the Communications Decency Act), and they would likely have significant unintended consequences across multiple markets.
The 2017-2018 Northrop Grumman purchase of Orbital ATK similarly shows the HSR regime in action. The analysis of that transaction focused on the degree to which Northrop’s purchase created a case of vertical integration in the space launch market. Raytheon, Boeing and other major competitors of Northrop Grumman raised strong concerns about the merger. They argued that the transaction would give Northrop Grumman a dominant market position, and that Northrop Grumman would not act as a merchant supplier in serving traditional Orbital ATK customers. To address these concerns, the DoD and the Federal Trade Commission established a 10-year consent decree committing Northrop Grumman to being a merchant supplier in the space launch market as a condition for the transaction to be approved.
The DoD will closely examine the transaction, but it is hard to see how the Lockheed Martin-Aerojet Rocketdyne deal does not end up also with a consent decree. The two deals are strikingly similar — and so, unsurprisingly, are the objections.
These objections, however, miss the essence of why the deal happened in the first place. Aerojet has struggled financially for years, and merging with Lockheed Martin strengthens Aerojet and helps to address a chronic defense-industrial base weakness.
Overall, these cases demonstrate the strength of the HSR regime at maintaining competition in the defense-industrial base. Rather than introducing uncertainty and risk, the administration is better served by keeping M&A policy “steady as she goes.”
Jerry McGinn is the executive director with the Center for Government Contracting at George Mason University.