The U.S. economy has seen a lot of transformation over the last decade. One concerning trend that continues to rear its head is consolidation, leading to less competition, which costs American consumers and taxpayers. That is why I was surprised to learn that Lockheed Martin, America’s largest defense industry company, announced its intention to acquire Aerojet Rocketdyne, the only remaining U.S. independent manufacturer of solid rocket engines.
With the U.S. developing both a modern Ground-Based Strategic Deterrent (GBSD) designed to shoot down incoming intercontinental ballistic missiles (ICBMs) as well as hypersonic missiles to keep pace with alarming technological advances by China and Russia, the stakes are high. The proposed Lockheed/Aerojet transaction is for a “vertical merger” whereby, if approved by the Federal Trade Commission (FTC) and Defense Department (DoD), Lockheed will acquire an essential component for a comprehensive missile program bid.
Such a deal may lead to harmful effects in the marketplace, blocking competition that would lead to higher prices, stifle innovation, and likely yield lower quality systems.
Last month, Senator Elizabeth Warren (D-Mass.) wrote a letter to the FTC, questioning the efficacy of the agency’s “behavioral safeguards,” which are designed to prevent a newly merged firm from using competitively sensitive information to the detriment of its rivals. She questioned whether or not they justified approval of the Northrop/ Orbital merger, and whether the same “behavioral safeguards” would apply to the pending Lockheed/Aerojet merger. Senator Warren asked tough questions about how the FTC is following up on whether those requirements really work to protect free and fair competition.
In response to Senator Warren’s letter, FTC Chair Lina Khan responded by outlining how she too is skeptical of the practice of imposing conditions on how companies operate, known as “behavioral remedies,” as contingencies for merger approval. She continued by saying, “in light of this, I believe anti-trust agencies should more frequently consider opposing problematic deals outright.”
The FTC has been shifting in recent years to evaluate the potential damage to the marketplace by vertical mergers. This latest response signals that they are prepared to make tough but forceful decisions to slow the trend of consolidation and fast-tracking of bad mergers.
In 2018, when the FTC and DoD approved the Northrop Grumman merger with Orbital ATK, America’s only other manufacturer of solid rocket motors, government regulators seemed to acknowledge the potential pitfalls. As such, they required a “behavioral remedy” on Northrop Grumman to “fix” the anti-trust problem. Northrup had to agree to sell rocket motors to all other defense companies who sought to compete for missile programs and “firewall” its new Orbital ATK acquisition from sharing proprietary information it received from others.
Boeing Corporation certainly didn’t think it would work. In 2019, Boeing withdrew from competition to produce the new GBSD system worth an estimated $80 billion citing the Northrup/Orbital merger — even though it was the incumbent and already invested, costing taxpayers plenty with nothing to show.
The proposed Lockheed/Aerojet merger may allow Lockheed to limit its business rivals’ access to a key component of a missile program bid. On a phone call for investors this past January, Lockheed Martin CEO James Taiclet points out that China operates its defense industrial base without the constraints of American anti-trust law. He said, “I think it’s better for the country (the US) and for the defense enterprise to enable the industry to make logical proposals for bringing in the mission systems,… the supply chain that goes into the major platforms into a more integrated organization”.
“Behavioral safeguards” would not be consistent with that business philosophy. FTC and DoD approval of the Lockheed deal would raise the prospects of a duopoly, with severe anti-trust implications.
Based on my own experience years ago as an advisor to a defense services firm, it is costly to prepare a bid for a major government contract. The risk of losing the bid must be weighed against the prospect of winning the contract. When one of the two rocket engine companies is owned by a competitor, the unfavorable risk assessment is, in effect, a barrier to entry.
What effect on other defense bidders will occur when only two competitors own both rocket engine companies? If Lockheed acquires Aerojet, what effect does that have on the bid process with other defense firms?
President Biden has at least partially answered this with an executive order last month entitled “Promoting Competition in the American Economy,” expressing concern over U.S. industry consolidation. His order “reasserts as United States policy that the answer to the rising power of foreign monopolies and cartels is not the tolerance of domestic monopolization but rather the promotion of competition and innovation…at home”. We should all remember that the ultimate consumer we seek to protect is not the U.S. government. The ultimate consumer is the American taxpayer that pays for the U.S. government. American leaders must stand up for those taxpayers. The FTC and DoD should keep that obligation in mind as they continue to review the Northrop/ Orbital vertical merger and carefully evaluate the nearly identical follow-on of Lockheed/ Aerojet.
• James S. Gilmore III is the immediate past Ambassador to the Organization for Security and Cooperation in Europe in Vienna, Austria. He was the 68th Governor of Virginia.