The Senate Armed Services Committee wants the Government Accountability Office to review the Pentagon's process for considering defense industry mergers and acquisitions, a topic that has become especially controversial in recent months following the government's blocking of Lockheed Martin's proposed $4.4 billion acquisition of Aerojet Rocketdyne.
The committee, in a report accompanying its version of the fiscal year 2023 defense authorization bill, says it wants GAO to brief lawmakers on the matter no later than March 1, 2023, and submit a report at a “mutually agreed upon date.”
The committee notes DOD released a report in February that found a “historically consolidated defense industrial base” and identified the need for “heightened review” of future mergers and acquisitions.
“The committee notes these concerns and believes competition within the defense industrial base improves cost, schedule, and performance for the products and services needed to support national defense and incentivizes innovation through competition,” the report states. “The committee believes a framework for ongoing monitoring and assessment of the industrial base, underpinned by adequate data (commercially available, as well as DOD-derived), is an important component for any effective, long-term approach.”
To that end, the committee wants GAO to evaluate DOD’s oversight processes for vetting proposed mergers and acquisitions, including the extent to which the department makes recommendations to federal agencies that make antitrust determinations.
Additionally, the committee wants GAO to review DOD’s “processes for determining the potential risk posed to the defense industrial base by mergers and acquisitions, both if consummated and if not consummated, including potential horizontal or vertical mergers that may present competition concerns and the situation of companies that may cease to be financially viable absent a merger or acquisition.”
Congressional staffers in June told reporters the committee’s interest in DOD’s vetting of M&A issues does not specifically reflect discomfort over the Federal Trade Commission’s decision to block Lockheed’s purchase of Aerojet but is warranted in light of the Pentagon’s newly stated posture on industrial base competition.
“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 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."
The report DOD released in February previewed the department’s 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.”
In a recent interview, former Deputy Defense Secretary David Norquist, who is now president and chief executive officer of the National Defense Industrial Association, said he believes the government's effort to crack down on M&A in the name of increasing competition is misguided.
“The mergers are the effect, not the cause,” he said. “The cause, even according to the [DOD] report itself, is budget cuts, low interest rates and long gaps between new programs. So, if you want to try to turn that around, you have to go after the cause. To try to close the door on the effect is not particularly effective or useful.”
Norquist was a top Pentagon official when Raytheon acquired United Technologies in 2020 and when Northrop Grumman acquired Orbital ATK in 2018.
Meanwhile, when the FTC sued to stop Lockheed’s acquisition of Aerojet earlier this year, it said 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.”