The Senate Armed Services Committee has passed a fiscal year 2023 defense authorization bill that requires the Government Accountability Office to conduct a review of the Defense Department's processes for monitoring mergers and acquisitions in the industry, according to a summary of the legislation released today.
The requirement follows months of unrest which, according to defense industry insiders, stems from the Federal Trade Commission’s decision to block Lockheed Martin’s proposed $4.4 billion acquisition of Aerojet Rocketdyne and the release of a DOD report pledging to increase its reviews of company M&A activity.
Committee staffers who briefed reporters on the condition of anonymity, however, said the required GAO assessment is not the result of “any one specific event.”
“I think there’s just a general concern with members,” one staffer said. “It’s really just good government to have GAO help give us an independent look, see if the process is working, and give ourselves an opportunity to build up if there is something more that we need to do and more pressure we need to put on the department.”
In February, the Pentagon released a report saying it recognizes it has a “historically consolidated” defense industrial base and plans to enforce greater competition.
“Given the extent of consolidation of key industries over the last decade, DOD will assess its approach to evaluating vertical and horizontal mergers, with adequate attention to risks to national security,” the report states. “DOD will work with interagency colleagues at the Department of Justice and Federal Trade Commission to further examine the impact of consolidation on the functioning of the defense market.”
When the FTC sued to stop Lockheed’s acquisition of Aerojet earlier this year, it said that if the deal were allowed, Lockheed would be able to “jack up the price the U.S. government has to pay” for missile-centric weapon systems, “while delivering lower quality and less innovation.”
The Biden administration’s posture on defense business consolidation, meanwhile, is a departure from the Trump administration’s more permissible approach, which allowed Raytheon to acquire United Technologies Corp. in 2020 and Northrop Grumman to acquire Orbital ATK in 2018.
In November 2021, committee Chairman Jack Reed (D-RI) cited increased M&A activity among large defense contractors as a key challenge to reforming Pentagon acquisition.
"We've seen the contractor base shrink through mergers and acquisitions," he said at the time. "There are two entities that build submarines. There are specialized entities that will build fighter aircraft, there are others that will build bombers. We're losing, I think, some of the dexterity we had in previous years, just being able to go out and make these systems more economic for the government and allow for more innovation."
Bill LaPlante, the Pentagon’s under secretary for acquisition and sustainment, told the committee in written statements prior to his March 22 nomination hearing, that he believes DOD needs to increase competition wherever it can, not just for its own sake but to “drive better behavior” among contractors and to keep large incumbents from becoming “complacent.”
LaPlante wrote that he believes M&A should be the “subject of ongoing dialogue between the Pentagon and the defense industry as we implement our acquisition policies and ensure effective competition.”