Lockheed Martin [LMT] has 30 days to decide whether to continue to pursue its acquisition of missile propulsion supplier Aerojet Rocketdyne
[AJRD] or terminate the merger agreement once the Federal Trade Commission files its lawsuit to block the merger, Lockheed Martin’s chief executive said on Tuesday.
“So, we’ll be working with our board over the next few days and weeks to make that determination,” James Taiclet, chairman, president and CEO of Lockheed Martin, said during the company’s fourth quarter earnings call.
The call started just after the FTC said it had voted 4 to 0 to file a preliminary injunction against allowing the $4.4 billion acquisition of Aerojet Rocketdyne by Lockheed Martin to proceed, citing anti-competitive concerns. The lawsuit is expected to be filed shortly in the U.S. District Court for the District of Columbia.
Lockheed Martin, and its U.S. competitors Boeing [BA], Northrop Grumman [NOC] and Raytheon Technologies [RTX], all supply the Defense Department with missiles. Aerojet Rocketdyne and Northrop Grumman, through its acquisition in 2018 of Orbital ATK, provide rocket motors and propulsion technology for these missiles.
“The FTC is suing to block Lockheed Martin, the world’s largest defense contract, from eliminating Aerojet, our nation’s last independent supplier of key missile inputs,” Holly Vedova, director of the FTC’s Bureau of Competition, said in a statement. “Lockheed is one of a few missile middlemen the U.S. military relies on to supply vital weapons that keep our country safe. If consummated, this deal would give Lockheed the ability to cut off other defense contractors from the critical components they need to build competing missiles. Without competitive pressure, Lockheed can jack up the price the U.S. government has to pay, while delivering lower quality and less innovation. We cannot afford to allow further concentration in markets critical to our national security and defense.”
The FTC also highlighted that Aerojet Rocketdyne is the only U.S. company that supplies divert-and-attitude control systems that power missile defense kill vehicles.
When the deal was first proposed in 2021, Taiclet said that Lockheed Martin would set up a firewall to guarantee that Aerojet Rocketdyne continues to serve as a merchant supplier of critical missile and rocket propulsion technology to the rest of the defense industry. Northrop Grumman has a similar firewall in place regarding Orbital ATK’s rocket and missile propulsion business, which was a condition the U.S. government required to allow that deal to proceed.
Asked on the call what the impact of foregoing acquisition would be on Lockheed Martin’s hypersonic weapons strategy, Taiclet replied that the company essentially will continue its current arrangements with outside propulsion system suppliers.
In the area of hypersonics, Lockheed Martin and its DoD customers are in agreement on a “go-fast approach to development,” Taiclet said, which means more upfront risk.
If Aerojet Rocketdyne were part Lockheed Martin, that would put the propulsion and missile engineers into a single organization, which means development could proceed more quickly and efficiently, he said.
“We think we could have gotten the speed and efficiency increase by partial vertical integration in hypersonics through the AJRD acquisition specifically, but we can still manage it whichever way that deal turns out,” Taiclet said.
If Lockheed Martin decides to terminate acquisition agreement, it will find other ways to deploy the capital that would have gone toward purchasing Aerojet Rocketdyne, he said.
The options for cash use include stock buybacks and dividend payments, the two areas most of the company’s cash being put toward, investments in new business growth, including internal research and development (IR&D) and capital expenditures, and entering joint ventures and acquiring other companies, Taiclet said. Lockheed Martin spent $3 billion on IR&D in 2021.
Potential investments in new business and mergers are limited, which is why most capital is going toward share repurchases and dividends, Taiclet said. In the area of acquisitions, available deals “are not necessarily expansive right now,” he said.
Lockheed Martin doesn’t plan to sit on the cash, Taiclet said. The company will continue its “dynamic and disciplined” approach to generate the best long-term return on investment for shareholders, he said.
The FTC said the administrative trial for its lawsuit is scheduled to begin on June 16.