A&D News

Citing concerns about the threat consolidation poses to national security, the Pentagon has announced its intent to increase oversight of defense contractor mergers. In a new report, it outlined a range of recommendations to counteract the reduced competition of a 30 year merger and consolidation bonanza. 

In a statement, the Department of Defense explained, “Having only a single source or a small number of sources for a defense need can pose mission risk and, particularly in cases where the existing dominant supplier or suppliers are influenced by an adversary nation, pose significant national security risks.”

The increased oversight stems in part from a Federal Trade Commission lawsuit against Lockheed to challenge a deal on antitrust grounds. DoD had previously said they wouldn’t oppose deals that bolstered suppliers, as long as the biggest players did not merge. But the number of A&D prime contractors has shrunk from 51 in the 1990s to five today. Weapons are available from a limited range of sources, with just three companies—Raytheon, Lockheed, and Boeing—making tactical missiles. With little competition, there is also little pressure to innovate or to perform well to gain new contracts. A DoD report asserts that this harms taxpayers, given that defense comprises half of federal total discretionary spending. 

The Pentagon has not fully elaborated on its plan to increase oversight over A&D mergers, but prior actions suggest that the DoD is especially concerned about consolidation in the hypersonic weapons sector, where there is intense competition with Russia and China. First-tier material suppliers, prime contractors, and first-tier subcontractors are all poised to purchase lower tiered hypersonic contractors and suppliers, thereby reducing competition—perhaps even eliminating it entirely. 

Players in this sector, as well as all A&D sectors, should plan for increased deal scrutiny. This could slow down deals, require more regulatory oversight, increase the bureaucratic burdens of deals, and potentially render some deals no longer possible.