The Pentagon has plans to expand its monitoring of defense contractor mergers and acquisitions with an eye toward potential national security and innovation risks, according to a recent letter sent to the Government Accountability Office.
The Office of the Assistant Secretary of Defense for Industrial Base Policy is crafting new policy guidance and intends to request funding in fiscal year 2025 -- and in subsequent years -- to more closely assess industry M&A activity, according to a letter sent to GAO from Pentagon acquisition chief Bill LaPlante.
At present, defense officials assess industry M&A activity without dedicated funding.
GAO included LaPlante’s letter in a new report focused on the Pentagon’s shortcomings related to monitoring industry M&A.
“DOD’s insight into defense M&A is limited,” the report states.
While GAO estimates that DOD assessed an average of 40 M&A actions per year between fiscal years 2018 and FY-22, that represents only a small portion of defense M&A, which was estimated in FY-17 to include about 400 actions annually.
Most of DOD’s assessments begin in response to antitrust reviews and are limited to large M&A actions over $114 million.
“Therefore, Industrial Base Policy’s M&A office and DOD stakeholders focus on evaluating competition risks in their M&A assessments,” GAO said.
Missing, however, is a focus on potential national security and innovation risks posed by some industry mergers and acquisitions.
“While DOD policy directs Industrial Base Policy and DOD stakeholders to assess other types of risks, such as national security and innovation risks, they have not routinely done so,” GAO said. “Moreover, DOD policy does not provide clear direction about which M&A DOD should prioritize for assessment, beyond those conducted in response to antitrust reviews.”
Pentagon officials told GAO that the M&A office, which is composed of two to three staffers, “does not have the staff resources” to initiate more assessments, especially involving smaller companies.
“Assessing whether the M&A office has adequate resources to meet its responsibilities and clarifying which defense suppliers’ M&A should be prioritized would help DOD better assess risks,” GAO said.
Additionally, GAO found that DOD does not monitor whether risks identified in its M&A assessments are ever realized.
“As a result, they cannot determine if risks occurred and whether further action is needed to mitigate them,” GAO said.
GAO produced the report in response to lawmakers who say they are concerned that defense M&A is eroding competition and strangling commercial innovation.
The Pentagon concurred with all of GAO’s findings and recommendations and, according to LaPlante’s letter, intends to draft new M&A risk assessment guidance in the coming months.
“IBP plans to conduct an additional assessment on the resources required to fulfill GAO's recommendation to expand DOD M&A activities,” the letter states.
The Pentagon, meanwhile, released a report in February 2022 pledging “heightened review” of defense M&A, citing an “historically consolidated defense industrial base.” The report followed Lockheed Martin's government-pushed termination of a $4.4 billion bid to acquire Aerojet Rocketdyne, which was later acquired by L3 Harris.