Lockheed-Sikorsky Deal Stokes Fears About Industry Consolidation
As the world’s largest defense company gets even larger, Pentagon leaders worry that competition is evaporating.
The Pentagon’s top arms buyer worries that Lockheed Martin’s upcoming $9 billion acquisition of Blackhawk helicopter maker Sikorsky is part of a bad trend in which large defense firms get bigger and competition wanes.
The Defense Department will not block the purchase, but “we believe that these types of acquisitions still give rise to significant policy concerns,” Frank Kendall, undersecretary for acquisition, told reporters Wednesday. “The Department of Defense is concerned about the continuing march toward greater consolidation in the defense industry at the prime contractor level.”
Pentagon leaders have been expecting an uptick in industry mergers for several years. In 2011, Ash Carter — then the acquisition chief, now defense secretary — warned that the Pentagon would not support mergers among the biggest companies.
“What I said then, and still believe, is that it was important to avoid excessive consolidation in the defense industry, to the point where we did not have multiple vendors who could compete with one another on many programs,” Carter told reporters Wednesday at the Pentagon.
Mergers of top-tier firms would not be good “for the taxpayer and warfighter in the long run,” Carter said. “We do need a competitive marketplace, to the extent that's possible within the defense industry.”
Kendall called the Lockheed-Sikorsky deal the most significant change to the defense industry since the general consolidation that followed the Cold War. It is, at least, the largest of 2015. Earlier this year, radio-maker Harris acquired Exelis for $4.5 billion and rocket-makers Orbital and ATK merged to form a $4.5 billion company.
Despite their concerns, the Defense Department leaders did not ask the Justice Department, which reviews such deals for antitrust concerns, to block the acquisition. The world’s largest defense company by revenue, Lockheed is the lead contractor on the $400-billion-plus F-35 Joint Strike Fighter program. But it does not build helicopters, which are Sikorsky’s specialty, and so the Justice Department approved the deal last week.
“Lockheed is not a helicopter manufacturer; that was at the heart of the Department of Justice determination,” Kendall said.
Kendall said the Pentagon would continue to work with the Justice Department to make sure company mergers do not limit direct competition. Already, much of the competition for major projects, such as planes and vehicles, is limited to a handful of companies, at most.
“If the trend to smaller and smaller numbers of weapon system prime contractors continues, one can foresee a future in which the Department has at most two or three very large suppliers for all the major weapons systems that we acquire,” Kendall said. “The Department would not consider this to be a positive development and the American public should not either.”
“With size comes power, and the department’s experience with large defense contractors is that they are not hesitant to use this power for corporate advantage,” Kendall said.
“The trend toward fewer and larger prime contractors has the potential to affect innovation, limit the supply base, pose entry barriers to small, medium and large businesses, and ultimately reduce competition — resulting in higher prices to be paid by the American taxpayer in order to support our warfighters,” he said.
Lockheed Martin pushed back against Kendall's comments.
"We understand and respect the department's concern about maintaining a proper balance between an efficient and competitive industrial base," Lockheed said in a written statement provided by a company spokeswoman. "However, we believe that defense contractors should continue to be assessed based on the performance and effectiveness of the products and solutions offered, not on the size of their company."
Kendall is pushing for policy and legal changes to “preserve the diversity and spirit of innovation that have been central to the health and strength of our unique, strategic defense industrial base, particularly at the prime contractor level.”