During the Trump administration, several high-powered defense-related mergers and acquisitions occured. L3 Technologies merged with Harris, United Technologies acquired Rockwell Collins and then merged with Raytheon, and the Northrop acquisition of Orbital ATK.
“I always say competition is our friend, competition typically brings out the best in everyone,” said Trump’s top weapons buyer, Ellen Lord, a former defense executive who served as the defense undersecretary for acquisition and sustainment, last month shortly before leaving the Pentagon. “That being said, I feel very strongly about not interfering in capital markets and I believe we need a free marketplace where companies decide themselves what they want to do.”
Some within the Pentagon opposed Lockheed’s 2015 acquisition of helicopter maker Sikorsky, however the Obama administration ultimately approved the deal.
That was from the article, Hicks Warns Against ‘Extreme Consolidation’ in Defense Industry. The backdrop is Lockheed’s planned $4.4 billion acquisition of Aerojet Rocketdyne, and DepSecDef Kathleen Hicks’ comments:
“Some consolidation is probably inevitable [because] the Defense Department isn’t sized … in many areas to maintain a large base, but extreme consolidation does create challenges for innovation.”
I think DoD leaders have to walk a fine line. Ellen Lord is definitely correct that government shouldn’t interfere with capital markets. But leaders have to realize how defense policies are incentivizing capital markets to reward consolidation.
The monopsony (single-buyer) structure of DoD will push industry towards monopolization — to the extent allowed by the buyer. A hallmark result of DoD monopsony are these massive once-in-a-generation weapons programs with extraordinarily long lead times. How else can industry handle the environment except respond to scale with scale.
However, leaders should recognize that the problem isn’t the size of the defense market. As Stanford researchers found, 225 companies shared about $70B in defense contracts in 1976. Those 225 companies merged into just 6 companies by 2019, and the amount of real contract dollars increased to $110B. So the number of real dollars per company grew nearly 60 fold over the last forty years!
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