What Is DoD’s Mergers & Acquisition Policy Anyway?
By: Andrew Hunter
Frank Kendall’s comments after Lockheed Martin purchased Sikorsky that alluded to significant policy concerns with defense industry consolidation at the higher tiers of the supply chain set off alarm bells, not just at Lockheed Martin headquarters in Bethesda, but in defense industry C-suites around the country. Most notable was his reference to potential legislative changes that would add national security concerns to the matters considered during antitrust reviews. And while he indicated he didn’t have strong concerns with the Sikorsky deal itself, coming after years of little public discussion of the Department of Defense (DoD) view of industry consolidation, these comments appeared as a bolt from the blue. In reality, however, they have roots going back several years.
On February 9, 2011, then–Under Secretary of Defense Ash Carter gave a seminal speech on a new era for defense industry at the Cowen Investment Conference in New York. Coming early in what we now know to have been the second year of a major drawdown in defense contract spending, Carter correctly predicted that major changes were forthcoming in the defense industry but ones that would look very little like those following the famous Last Supper of 1993. And in fact, as CSIS analysis has shown, to date industry has not experienced consolidation anything like that of the 1990s. However, it is highly likely that some degree of industry consolidation is coming, making the question of just what mergers DoD might support and what it might oppose a matter of great interest.
The policy Carter announced that day in New York was understood to discourage further mergers of major defense primes but to be open to consolidation farther down the supply chain. While this initial reading was essentially true, it overlooked a more comprehensive policy articulated in the speech. Carter emphasized that the department would look at the health of industry in every sector and that it was concerned about industry health across all tiers of the supply chain. Kendall’s recent comments referred to this framework, citing concern about excessive consolidation that limits competition across industry sectors and concern that particularly large firms could gain enough market power to influence entire supply chains across multiple tiers. These concerns should be highly relevant in an antitrust review, making it less clear what a specific national security consideration would add. It is also important to remember that DoD has other tools to influence industry behavior, as the Navy demonstrated when it requested modifications in Northrop Grumman’s successful spin-off of Huntington Ingalls Industries.
What is missing today is perhaps the key aspect of Carter’s Cowen speech: his call for dialogue between DoD and industry. Such a dialogue would allow DoD’s policy concerns to be articulated in a nuanced way and be shaped by industry feedback. While industry was focused in recent years on internal cost cutting and divestments, this dialogue has been largely deferred. The time to begin it in earnest is now.