{"id":33490,"date":"2022-02-02T20:48:22","date_gmt":"2022-02-02T20:48:22","guid":{"rendered":"https:\/\/one.sightlinemg.com\/defensenews\/uncategorized\/2022\/02\/02\/why-the-ftcs-lawsuit-could-chill-the-market-for-defense-deals\/"},"modified":"2026-08-07T22:43:22","modified_gmt":"2026-08-07T22:43:22","slug":"why-the-ftcs-lawsuit-could-chill-the-market-for-defense-deals","status":"publish","type":"post","link":"https:\/\/one.sightlinemg.com\/defensenews\/industry\/2022\/02\/02\/why-the-ftcs-lawsuit-could-chill-the-market-for-defense-deals\/","title":{"rendered":"Why the FTC\u2019s lawsuit could chill the market for defense deals"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">WASHINGTON \u2015 The federal government\u2019s move to block Lockheed Martin\u2019s planned $4.4 billion purchase of Aerojet Rocketdyne could have a chilling effect on future mergers and acquisitions among large defense firms, according to experts.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">With the Federal Trade Commission\u2019s lawsuit last week to stop the deal, it rejected a proposed behavioral remedy that would require Aerojet continue to supply missile components to Lockheed\u2019s competitors. That\u2019s being interpreted as a sign regulators will more heavily scrutinize vertical acquisitions, in which a company acquires a supplier.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cAnybody doing a sizable vertical deal has to look at this precedent and recognize, if there\u2019s a real vertical issue, the [FTC\u2019s] predilection may be not to do a remedy, which means it\u2019s an up or down decision,\u201d said Jeff Bialos, an antitrust attorney and former deputy undersecretary of defense for industrial affairs.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">In its announcement of its opposition, the FTC argued that if the acquisition between Lockheed, \u201cthe world\u2019s largest defense contractor,\u201d and Aerojet, the \u201clast independent U.S. missile propulsion provider\u201d were to take place, \u201cLockheed will use its control of Aerojet to harm rival defense contractors and further consolidate multiple markets critical to national security and defense.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Some view the FTC\u2019s tough language as a clear signal to the defense industry.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cIt\u2019s hard not to read the complaint any way other than that big vertical transactions will be viewed very skeptically by the FTC, and it seems like it\u2019s pretty clear,\u201d said Jerry McGinn, a Pentagon manufacturing and industrial base policy official in the Obama and Trump administrations.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Brett Lambert, who served as a deputy assistant secretary of defense for manufacturing and industrial base policy in the Obama administration, predicted the decision would reverberate through the board rooms of every prime contractor in the defense sector. Lambert was Northrop Grumman\u2019s vice president for corporate strategy when the company made a similar acquisition.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cTheir position is quite clear, and how industry reacts and whether that\u2019s in the best interest of the warfighter and the taxpayer is still unclear,\u201d said Lambert, now the managing director of the Densmore Group, a national security and intelligence consultancy.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">An administrative law judge will decide the case in a trial that is scheduled to begin on June 22. In the meantime, the FTC filed the complaint in the U.S. District Court for the District of Columbia to seek a preliminary injunction to stop the deal pending the administrative trial.<\/p>\n\n\n\n<h1 class=\"wp-block-heading\">Northrop\u2019s deal<\/h1>\n\n\n\n<p class=\"wp-block-paragraph\">The FTC, in 2018, allowed Northrop Grumman\u2019s $7.8 billion acquisition of Orbital ATK. The FTC sought to address anticompetition concerns by requiring behavioral remedies, mandating the combined company provide solid fuel rocket motors on a nondiscriminatory basis to competitors for missile contracts and implement firewalls to ensure the combined company would not misuse information from competitors.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Since 2019, the FTC has been probing \u201ca potential issue\u201d with Northrop\u2019s compliance with those remedies, in connection with a then-pending missile competition, according to company filings. In its latest annual filing, Northrop disclosed that it has reopened discussions with the FTC over the issue.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The company said it promptly complied with the FTC\u2019s original civil investigative demand and that it \u201chas been and continues to be in compliance with the Order,\u201d in line with ongoing \u201crobust actions to help ensure compliance with the terms of the Order.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The competition is likely the Air Force\u2019s multibillion-dollar <a href=\"https:\/\/www.defensenews.com\/congress\/budget\/2021\/09\/09\/lawmakers-set-for-battle-over-next-gen-nuclear-missile\/\" target=\"_blank\">Ground Based Strategic Deterrent<\/a> program to replace the Minuteman III intercontinental ballistic missile. Boeing accused Northrop of holding an unfair advantage in the competition and pulled out, leaving Northrop the competition\u2019s lone bidder and <a href=\"https:\/\/www.defensenews.com\/space\/2020\/09\/08\/northrop-wins-the-air-forces-contest-for-next-gen-icbms\/\" target=\"_blank\">winner<\/a>.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Regulators in the Biden administration have been most vocal about their concerns about competition in the tech industry, primarily about behemoths like Facebook and Google.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But in August, Federal Trade Commission Chair Lina Khan caught the eye of defense watchers when she sent a letter to one of the Lockheed-Aerojet deal\u2019s opponents, Sen. Elizabeth Warren, D-Mass., where she said behavioral remedies \u201chave often failed to prevent the merged entity from engaging in anticompetitive tactics.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cWhile structural remedies generally have a stronger track record than behavioral remedies, studies show that divestitures, too, may prove inadequate in the face of an unlawful merger,\u201d Khan\u2019s letter reads. \u201cIn light of this, I believe the antitrust agencies should more frequently consider opposing problematic deals outright.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Warren had raised concerns to Khan about vertical integration and consolidation in the defense industry, and she noted the FTC\u2019s 2019 investigation into Northrop.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">At a Jan. 26 Council on Foreign Relations event, Lockheed\u2019s chief executive, Jim Taiclet, defended the company\u2019s effort at vertical integration with Aerojet, saying the intent was to make the contractor\u2019s development of hypersonic missiles, certain space vehicles and other missiles more efficient.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cThe benefit of putting the companies together in a vertical integration &#8230; is that we would bring our engineering power to the propulsion side of those products. We would be able to integrate them faster, test more quickly, take cost out, actually, and we made all those cases to both the Department of Defense and the FTC,\u201d Taiclet said.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">The Pentagon hasn\u2019t made its views on the merger public, and those views were redacted from the complaint, which some speculate is a sign DoD would have accepted the Lockheed-Aerojet merger with conditions. That, in turn, has fueled speculation about a diminished role for the Pentagon in antitrust reviews.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cI think what\u2019s interesting &#8230; is the diminution of the role of the customer in decision making,\u201d Lambert said. To Lambert, the Pentagon\u2019s voice as the sector\u2019s main client \u201cshould weigh on the scale a bit more\u201d with regulators.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A lead official in those reviews, <a href=\"https:\/\/www.defensenews.com\/smr\/transition\/2020\/12\/30\/biden-selects-hicks-kahl-for-top-dod-roles\/\">Deputy Defense Secretary<\/a> <a href=\"https:\/\/www.defensenews.com\/pentagon\/2021\/02\/02\/how-kathleen-hicks-will-approach-nukes-shipbuilding-and-the-budget\/\">Kathleen Hicks<\/a>, <a href=\"https:\/\/www.defensenews.com\/congress\/2021\/02\/02\/to-keep-up-with-rivals-dod-nominee-will-weigh-consolidation-vs-innovation\/\" target=\"_blank\">told lawmakers at her confirmation hearing a year ago<\/a> she was \u201cconcerned\u201d about consolidation in the defense industrial base and that competition is needed to maintain an edge over China and Russia.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cExtreme consolidation does create challenges for innovation,\u201d Hicks said at the time. \u201cWe need to have a lot of different good ideas out there. That\u2019s our competitive advantage over authoritarian states like China, and Russia. And so if we move all competition out, obviously, that\u2019s a challenge for the taxpayer. But it\u2019s also a challenge in terms of the innovation piece.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Still, McGinn said it seems likely the Pentagon would have favored the Lockheed-Aerojet deal because the transaction would have bolstered Aerojet,<b> <\/b><a href=\"https:\/\/www.bizjournals.com\/sacramento\/news\/2019\/04\/25\/aerojet-cutting-180-more-jobs-in-rancho-cordova.html\" target=\"_blank\">which has struggled at times as<\/a> a producer of vital missile parts, and because DoD previously favored the Northrop-Orbital ATK transaction.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cThis transaction on the face of it gives Aerojet strong financial footing, being part of a big prime,\u201d said McGinn, now executive director of the Center for Government Contracting at George Mason University. \u201cI\u2019ve anticipated that DoD would recommend approval [of the deal] with a consent decree, and nothing in the reporting has contradicted that.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">A slowdown in vertical integration could mean more companies will be absorbed by private equity firms, experts said.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cIn my experience over 30 years, defense companies in private-equity hands tend not to be in the interest of the warfighter,\u201d Lambert said. \u201cTheir motive is cash. The typical case is there\u2019s no investment in research, and if you think about the unique nature of the defense industry, these are companies that need to be around for 20 to 25 years.\u201d<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Lockheed said it may elect to end the merger agreement or fight the case, and its decision is expected before the end of the month.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">If the case goes to court, it\u2019s likely Pentagon leaders will be called to voice their views in public.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">\u201cThere\u2019s some chance that the parties could persuade the court a remedy is appropriate, and &#8230; you would probably see testimony from the Defense Department &#8230; and that would be factor in the judge\u2019s decision,\u201d Bialos said.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8216;Anybody doing a sizable vertical deal has to look at this precedent.&#8217;<\/p>\n","protected":false},"author":7,"featured_media":55379,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_yoast_wpseo_meta-robots-noindex":"","_yoast_wpseo_meta-robots-nofollow":"","_yoast_wpseo_canonical":"","_acf":"","_yoast_wpseo_primary_category":0,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","_smg_distribution_targets":[]},"categories":[160,12,36],"tags":[],"coauthors":[3446],"class_list":["post-33490","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-daily-news-roundup","category-industry","category-newsletters"],"acf":{"subheadline":"","legacy_arc_id":"SUCWOLL4SRCMZIOOV7QNTN75VQ","arc_canonical_url":"\/industry\/2022\/02\/02\/why-the-ftcs-lawsuit-could-chill-the-market-for-defense-deals\/","remove_feature_photo":false,"is_sponsored":false,"subtype":"","redirect_url":"","disable_inline_ads":false,"native_logo_pretext":"Presented By:"},"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.0 (Yoast SEO v28.1) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Why the FTC\u2019s lawsuit could chill the market for defense deals - Defense News<\/title>\n<meta name=\"description\" content=\"&#039;Anybody doing a sizable vertical deal has to look at this precedent.&#039;\" \/>\n<meta name=\"robots\" content=\"noindex, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why the FTC\u2019s lawsuit could chill the market for defense deals\" \/>\n<meta property=\"og:description\" content=\"&#039;Anybody doing a sizable vertical deal has to look at this precedent.&#039;\" \/>\n<meta property=\"og:url\" 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