Defense Business Brief: More M&A scrutiny; Another budget increase; Boeing touts tanker jobs; and a bit more.
Less than 36 hours after Lockheed Martin said it would walk away from its $4.4 billion acquisition of Aerojet Rocketdyne, the Biden administration said it would exert more scrutiny over defense mergers in order to preserve competition.
As others have noted, it’s the strongest stance the Pentagon has taken on mergers and acquisitions since the Obama administration. Recall back in 2011 when then-Pentagon acquisition chief Ash Carter warned the large defense firms against combining with one another. But there’s been plenty of M&A among the top tier since then—the most recent, and largest, being Raytheon and United Technologies merging in 2020.
“The consolidation trend is even more pronounced in the hypersonic weapon systems sector, which currently has only one prime contractor,” the Pentagon said in its new 30-page report.
The Federal Trade Commission sued to block Lockheed’s acquisition of Aerojet, saying the deal could “harm rival defense contractors and further consolidate multiple markets critical to national security and defense.” Hypersonics is one of those markets.
Senior defense officials did not mention the new industrial base report during a meeting earlier this month with more than a dozen CEOs from companies working on hypersonic weapon projects, according to an industry source.
The report, which was mandated by President Biden in an executive order last summer, includes a handy chart that clearly shows how the number of weapon makers has declined over the past 30 years. (Of note, that same chart misspelled Northrop Grumman…twice.)
One thing the report does not mention is the Pentagon’s use of joint programs, Capital Alpha’’s Byron Callan wrote in a Feb. 15 note to investors. The Lockheed-made F-35, for instance, is replacing a handful of aircraft made by four different companies across the Air Force, Navy, and Marine Corps.
“In prior aircraft generations, there were instances where aircraft types were shared (e.g., the F-4 Phantom) but ‘joint’ programs tend not to be sourced from multiple contractors, and elimination of unique designs for the Navy or Air Force have reduced opportunities for stand-alone contractors,” Callan wrote. “Technology maturation has also meant that platform programs have longer production runs.”
In addition to increased M&A scrutiny, the Pentagon report signals out four other areas of oversight, including addressing intellectual property limitations, increasing new entrants, increasing opportunities for small businesses, and implementing sector-specific supply chain resilience plans.
BONUS: My colleague Valerie Insinna from Breaking Defense has more about an alleged “boardroom coup” at Aerojet Rocketdyne that’s come in the fallout of the failed Lockheed deal. Read that here.
In budget news, the Pentagon seems poised to get a spending boost in fiscal 2023 as it looks to boost military modernization amid increased inflation, according to a Reuters report. The Biden administration is expected to ask for more than $770 billion, the report states. For context, That’s way up from the $705 billion Congress appropriated in fiscal 2021 and the $740 billion approved in the 2022 National Defense Authorization Act (lawmakers have not yet passed a budget for this year, freezing spending at the 2021 level. Assuming Congress appropriates $740 billion for the Pentagon this year, the 2023 request would be a more than 4 percent increase.
And Congress could further add to that $770 billion. “We believe it is likely that Congress would again increase the final defense appropriations amount for FY23 by a similar amount that it did this year ($25B+),” Cowen and Company analyst Roman Schweizer wrote in a Feb. 17 note to investors.
The counter argument to increasing the defense budget: “Devoting this enormous sum to the Pentagon at a time when the greatest challenges to our security—from pandemics to climate change—are not military in nature is both misguided and counterproductive, said William Hartung, a senior research fellow at the Quincy Institute for Responsible Statecraft. “The $770 billion figure is far higher than what the United States spent for military purposes at the height of the Korean or Vietnam Wars or the Reagan buildup of the 1980s.”
European defense spending is also expected to rise in response to the Russia-Ukraine crisis. “We assess that there is a 90% probability that U.S. and European defense spending will be higher in 2023-26 than current plans show and that delivery of weapons ordered by Poland, Romania, Sweden, and Finland will be accelerated,” Capital Alpha’s Callan wrote on Feb. 12.
Meanwhile, the U.S. State Department has approved a $6 billion sale of 250 Abrams tanks to Poland. “The proposed sale will improve Poland’s capability to meet current and future threats by providing a credible force that is capable of deterring adversaries and participating in NATO operations,” the Defense Security Cooperation Agency, the arm of the Pentagon that oversees arms sales, said in a Feb. 17 statement.
Playing catch up? Two weeks after Lockheed and Airbus launched a PR campaign touting 1,300 new jobs that would be created if it were selected to build up to 160 new Air Force tanker planes, Boeing touted the “40,000 American workers from more than 500 businesses” that support its KC-46 tanker, which is already in production. The vast majority of those jobs are indirect jobs for suppliers. One would assume that if Lockheed and Airbus stand up a production line for A330 tankers in the U.S. and rely on U.S. suppliers, they too would likely support tens of thousands of indirect jobs as well. But this is the political jobs game played between every company competing for a multibillion military contract.
General Dynamics has added GM Defense to its team competing for the U.S. Army’s Optionally Manned Fighting Vehicle. “I see tremendous synergies as we seek to leverage our core capabilities in integrated vehicles, power and propulsion, and mobility and autonomy to support the OMFV program, GM Defense President Steve duMont said in a statement. “We look forward to collaborating with a great company such as General Dynamics Land Systems, as we combine and leverage our advanced technologies, digital design expertise, and manufacturing scale to help produce the most capable infantry fighting vehicle for the U.S. Army warfighter.”
Sikorsky and Boeing say they will use a Honeywell engine in their Defiant X helicopter being pitched for the Army’s Future Long-Range Assault Aircraft competition. Last year, rival Bell said it would use a Rolls-Royce engine in its V-280, which is competing against the Defiant X.
Northrop Grumman has delivered the 900th F-35 fuselage to Lockheed Martin, a significant milestone as production of the stealth fighter nears 1,000 jets. As of mid-December, more than 730 F-35s from nine nations were in service globally, according to Lockheed.
Raytheon Technologies has appointed Christopher Calio chief operating officer. Calio, who is the president of Pratt & Whitney, is being replaced by Shane Eddy, currently senior vice president and chief operations officer at Pratt & Whitney. Both appointments are effective March 1.
HawkEye 360 named Deborah Lee James, Essye Miller, Mike Rogers, and Paul Zukunft to its advisory board.
From Defense One
Poland to Buy $6 Billion in US Tanks, Assault Bridges, Explosives; Russian Advancing Force Grows to 190,000 // Tara Copp
In Warsaw, Austin warns 'thousands' of Ukrainians could flee into Poland, 'trying to save themselves and their families from the scourge of war."
Navy Chief Sees Robot Ships Alongside Aircraft Carriers Within Five Years // Bradley Peniston
The service may create a new enlisted specialty to operate them.
Biden Says Russia Will Attack Within 'Several Days;' Blinken Lobbies For Peace at UN // Tara Copp and Jacqueline Feldscher
Russians "edge closer to that border," with troops, combat aircraft, ships, and blood supplies, says Austin at NATO HQ.
US Companies Warned to Prepare for Russian Cyber Attacks // Patrick Tucker
DOJ's Lisa Monaco warns industry to harden defenses; Ukraine's foreign weapons systems are a likely target for Russian hackers.
The U.S. Needs More Military Arms Makers, Says Pentagon No. 2 // Caitlin M. Kenney
Defense firm consolidations have killed competition for government contracts, a White House-ordered study finds. The industrial base must expand, says Hicks.
Will Biden's 'Severe Costs' on Russia Include Cyber Attacks? // Carrie Cordero
We should know more about U.S. cyber operations by now.
The Space Force Isn't a Military Service // Paula Thornhill
Unlike its sister branches, it doesn't deal in violence. It needs a different model.
Drones Shooting Microwave Rays Could Be the Drone Killers of Tomorrow // Patrick Tucker
Moving away from vacuum tubes is making microwave weapons smaller and smarter.