The Pentagon has very few tools in its arsenal to constrain major mergers and acquisitions between prime contractors – a fact that has become all too apparent to defence acquisition chief Frank Kendall with Lockheed Martin’s $9 billion acquisition of Sikorsky.
Kendall this week reaffirmed his concerns about further consolidation of the US defence industrial base, and cautions against ending up with just two or three massive prime contractors supplying most of America’s weapon systems – a situation he says is bad for the government, military and taxpayer.
Speaking to reporters at a Defense One acquisition forum in Washington 6 October, the top weapons buyer lamented the loss of names like McDonnell Douglas, Grumman, Martin “and now Sikorsky” to industry consolidation, but he stopped short of whacking Lockheed’s Sikorsky acquisition specifically.
“I like competition; I like having multiple sources and I do think – as I mentioned in my statement last week – size does confer a certain degree of power,” says Kendall. “That’s not a judgement, it’s just a fact.
“Corporations are expected to, and should for their shareholders, operate in ways that enhance shareholder value. I expect that, and I don’t criticise that at all. The government, on the other hand, has an interest in maintaining a good competitive environment and maintaining a range of suppliers.”
Kendall fired a warning shot at major defence firms last week with a statement against further consolidation. He writes that the Department of Defense will work with US lawmakers to “explore additional legal tools and policy” to preserve diversity among the industrial base.
The statement came less than a week after the Department of Justice cleared passage of the Sikorsky acquisition from United Technologies (UTC), since it did not trigger any anti-trust laws, mostly because Lockheed is not currently a helicopter manufacturer.
Industry analysts says the DOJ ruling could see the deal close in the fourth quarter of 2015 or in early 2016, and more details are likely to emerge from Lockheed’s third quarter earnings call 20 October.
Kendall’s comments have received widespread rebuttal from industry groups, with Aerospace Industries Association (AIA) president and chief executive David Melcher saying constant budget uncertainty and a shortage of new programmes is to blame.
“We’re seeing fewer and fewer new programmes which start farther and farther apart,” Melcher said in a statement. “With fewer programmes for which to compete, the stakes for individual companies grow ever higher. In this environment, it’s no surprise that industry is looking to become leaner and more efficient.”
According to Kendall, one option for constraining mergers and acquisitions among the primes could be a clause that takes national security concerns into consideration in M&A decisions.
“The defence industrial base at the prime level is a small group of contractors who make very specialised products that are very expensive in relatively small numbers, and there are some very unique skill sets with that that aren’t easily replicable,” he explains. “There’s also the understanding of how to operate with the government and operate in the environment we operate in, and there’s of course knowledge of the technologies involved.
“I think the trend [of consolidation] is troubling. I think the tools we have to manage that trend are inadequate based on my recent experience.”