Lockheed weighs options in light of FTC lawsuit to block Aerojet merger

Lockheed Martin executives are looking to "evaluate all of our options" after the Federal Trade Commission filed a lawsuit to block a proposed $4.4 billion acquisition of Aerojet Rocketdyne, Lockheed's chief executive said during an earnings call today.

CEO Jim Taiclet said officials will be working with their board “over the next few days and weeks” to decide whether to go to court to defend the deal or terminate the proposal.

“As we disclosed in our earnings release this morning, we thought it highly likely that the FTC would sue to block the transaction,” he told analysts, referencing an earlier financial filing statement that showed the FTC had concerns that couldn’t be “addressed adequately” via consent order. “Since that time, we have received notification from the FTC that they have in fact authorized filing a lawsuit.”

After filing suit, Holly Vedova, the FTC’s Bureau of Competition head, said in a statement that officials “cannot afford to allow further concentration in markets critical to our national security and defense,” citing cost and quality concerns.

“The FTC determined that the proposed transaction harms competition for several weapons systems that [the Defense Department] relies on to defend the nation and there is no sufficient remedy to alleviate those harms,” she noted.

Meanwhile, Aerojet in a separate statement this morning stressed “the benefits of the transaction for the United States and its allies, the industry, and all of the company’s stakeholders.”

Taiclet said the merger agreement allows for a 30-day period for the company to make a decision following the filing of a lawsuit. He didn’t indicate which path the company may take.

Raytheon CEO Greg Hayes, who’s spoken out against the deal, didn’t weigh in on the topic during his company’s 2021 fourth quarter earnings call earlier today. Raytheon is based in Waltham, MA.

Meanwhile, members of Congress have weighed in on the subject, with Sen. Elizabeth Warren (D-MA) previously asking the Securities and Exchange Commission to investigate and Senate Armed Services Committee Chairman Jack Reed (D-RI) speaking out against defense industry consolidation.

The Defense Department, which reviewed the proposed deal and provided input to the FTC, is declining to say whether it advised against the merger.

Pentagon Press Secretary John Kirby said the department shared its views with the FTC in a December letter from Deputy Defense Secretary Kathleen Hicks.

“The department shared our conclusions on the proposed merger to the Federal Trade Commission,” he said. “Because our information was used for internal deliberations, I cannot and won’t share the department’s recommendations.”

The FTC, meanwhile, says DOD organized a series of interviews with “DOD-impacted stakeholders” to assess the proposed deal.

“I deeply appreciate the collaborative relationship between DOD and FTC staff who worked closely throughout this investigation,” Vedova said. “The FTC determined that the proposed transaction harms competition for several weapon systems that DOD relies on to defend the nation and there is no sufficient remedy to alleviate those harms.”

In its statement, the FTC said Lockheed’s proposed acquisition of Aerojet, which makes advanced missile propulsion systems and supplies them to prime contractors, would give Lockheed “control over critical propulsion inputs that its rivals require to compete.”

“Specifically, the complaint alleges that the proposed acquisition would give Lockheed the ability and incentive to deny, limit, or otherwise disadvantage competitors’ access to critical propulsion inputs for various weapon systems,” the FTC said. “The combined firm could disadvantage rivals by affecting the price or quality of the product, the quality of the engineering support, and the schedule and contract terms for developing and supplying it or otherwise disadvantage its rivals.”

The FTC also noted that Aerojet as a subcontractor for other large firms like Raytheon, Boeing and Northrop Grumman, “has had access to prime contractors’ sensitive information about technological advancements, cost, schedule, and business strategies.”

The FTC said Lockheed would therefore “have an incentive to exploit its access to its rivals’ proprietary information to gain an advantage in competitions against them.”

The FTC noted in its statement that this is the agency’s first “litigated defense merger challenge in decades." FTC spokeswoman Betsy Lordan said a 1992 case involving Alliant Techsystems’ unsuccessful attempt to acquire part of the Olin Corporation’s military business is likely the most recent case in which the agency sought to block a defense merger.