Defense Business Brief: Questions loom about Lockheed Martin-Aerojet deal; New Skunkworks factory; Warren aide tapped for top Pentagon policy position, and more.
The government should block more mergers and acquisitions that limit competition, new Federal Trade Commission Chair Lina Khan wrote in a letter to Sen. Elizabeth Warren, D-Mass. Her comments come as antitrust regulators review Lockheed Martin’s planned acquisition of Aerojet Rocketdyne.
In the seven-page missive, Khan, who Biden named FTC chair in June, said she’s suspicious of so-called behavioral remedies—conditions put in place to ensure competition. Since the deal was announced late last year, Lockheed has said it expects the government to impose conditions that would require it to supply its competition. Khan said:
“I am skeptical that behavioral remedies alone are sufficient to prevent a vertical merger from causing harm. This is especially true for vertical mergers involving large firms with substantial market power at one or more levels of the supply chain. The larger the market share, the higher the risk that a vertical merger will result in a reduction of competition post-merger. For that reason, I prefer structural remedies that prevent the harmful integration of assets, or would support the Commission moving to block the merger altogether.”
Northrop Grumman’s acquisition of Orbital ATK contained such a provision, which required it to supply its competitors. The FTC is reportedly investigating whether the company is adhering to that provision.
Raytheon, which is headquartered in Warren’s home state, opposes the Lockheed-Aerojet deal. Warren, who publicly released Khan’s letter on Thursday, said:
“Given the waves of defense industry mergers that have slashed competition and reduced the number of major firms tenfold, both the FTC and Congress need to make major antitrust reforms in order to protect national security and cut costs for American taxpayers. The FTC can do more to address these concerns, including opposing transactions that would typically be subject to bogus structural or behavioral remedies and retrospectively unwinding anticompetitive mergers. During this period of rampant industry consolidation, Congress should give the FTC greater power to reject problematic mergers outright.”
Still unknown is the Pentagon’s position on the merger. Typically the undersecretary for acquisition and sustainment would play a key role in voicing the Pentagon’s opinion, but that position has been filled by acting officials since the Biden administration came to power in January.
Khan’s letter lowers the chances of the deal happening, Capital Alpha Partners analyst Byron Callan wrote in a Thursday note to investors. He had previously said there was a 55 percent chance of approval. It’s not dropped to 25 percent, he said.
“If new civilian leadership in the DoD does not support the deal and FTC blocks it, we don’t see it as a game changer for the defense sector. Aerojet Rocketdyne is somewhat unique because of its position as a key supplier to Lockheed Martin and Raytheon Technologies on missile and space programs. We can’t think of another independent company the size of Aerojet Rocketdyne, or larger, that plays the same role as a critical supplier to multiple primes that would trigger vertical integration concerns.”
Meanwhile, Lockheed showed off a brand new, really big manufacturing facility in Palmdale, California, this week. The 215,000-square-foot factory is part of its super secretive Skunk Works division that largely works on classified military aircraft projects. It touted the new facility as having the “digital foundations to incorporate smart manufacturing components, embrace the Internet of Things, and deliver cutting-edge solutions rapidly and affordably to support the United States and its allies.”
The White House said President Biden intends to nominate Sasha Baker, to be deputy undersecretary for policy. Baker served as national security advisor for Sen. Warren, and deputy chief of staff for former SecDef Ash Carter.
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