The Defense Department faces limitations in its insight into defense mergers and acquisitions (M&A) despite its concerns that industrial base consolidation can decrease competition and reduce resiliency in the supply chain, a government auditing agency reported this week.
Federal M&A reviews are conducted by the Department of Justice or Federal Trade Commission (FTC)—which also have sole enforcement authorities—and these agencies may seek DoD input if defense is involved. DoD can also initiate its own research and provide results to the DoJ or FTC.
Among its findings, the Government Accountability Office (GAO) says that DoD estimates there are about 400 M&A transactions annually yet the department only assessed about 40 per year from 2018 to 2022 and that the focus has been on large dollar deals and competition risks and less emphasis on “national security or innovation risks.”
In 2021, DoD assessed 48 deals none of which were below the transaction cost threshold that triggers an anti-trust review, the report says. That value is currently $111.4 million. In 2022, the department conducted 32 reviews, five of which were below the Hart Scott Rodino anti-trust threshold, GAO says.
The focus on high dollar M&A is partly due to unclear policy guidance on what defense suppliers should be prioritized to be assessed because of limited staff, says the Oct. 17 report. It also highlights that the Pentagon’s M&A office within the Industrial Base Policy branch has two to three full-time staffers and that a single, large, complex transaction may require most of the staff resources.
GAO also says that DoD Industrial Base officials said they frequently lack the capacity to assess smaller M&A deals and that they also lack the resources to “conduct any recurring macro-level trend analyses or a complete analysis of markets following mergers to assess defense industrial base consolidation.”
The report also says that there are limits to the data that DoD has access to when conducting reviews. For example, GAO says DoJ and the FTC cannot share all the information they collect on a proposed transaction due to confidentiality restrictions. This data may include customer lists, sales, and marketing data.
When it comes to data controlled by DoD, the Industrial Base Policy office and department stakeholders told GAO that although the information they have on prime contractors is “robust,” they have less visibility on “sub-tier suppliers.” The contracting data available to DoD provides insight into work merging companies have with the department but not their market shares.
This makes it difficult to assess the impacts of an acquisition on industry consolidation, DoD officials told GAO.
GAO’s recommendations, all of which DoD agreed with, include adequately resourcing the Industrial Base Policy’s M&A office, having the Assistant Secretary of Defense for Industrial Policy give clear guidance on defense suppliers that should be prioritized for M&A reviews, broaden the range of risks and benefits associated with M&A deals, and conduct follow-up assessments of completed transactions to see what, if any, risk concerns were born out and if further actions are needed.