Responding to a July letter from Sen. Elizabeth Warren (D-Mass.) that large defense contractors acquiring their key suppliers is eliminating competition, a top U.S. regulator replied this month that putting firewalls in place so that acquired companies can continue to serve as suppliers to other contractors frequently doesn’t work.
Warren’s letter was driven by concerns that the pending acquisition by Lockheed Martin [LMT] of Aerojet Rocketdyne [AJRD], one of two U.S. suppliers of solid rocket motors, would eliminate the last independent provider of these products. Northrop Grumman [NOC], through its 2018 acquisition of Orbital ATK, is the other supplier of solid rocket motors.
In the case of Orbital ATK, the U.S. government required Northrop Grumman to put behavioral remedies–essentially firewalls so that the acquired company can still have some operational independence–in place so that Orbital ATK could continue to function as an independent supplier of rocket motors for the larger aerospace and defense industry.
The Aug. 6 reply to Warren from Lina Khan, chair of the Federal Trade Commission, casts a degree of doubt on Lockheed Martin’s planned acquisition. Khan’s letter was first reported by Bloomberg on Aug. 12 and then posted later that day on Warren’s Senate website.
The FTC has been closely scrutinizing the deal for Aerojet Rocketdyne but Lockheed Martin maintains that it expects to close the acquisition in the fourth quarter of 2021.
Byron Callan, an aerospace and defense analyst with the strategic advisory firm Capital Alpha Partners, wrote in a client note last Thursday evening that “We had 55% odds that the Lockheed Martin-Aerojet Rocketdyne deal would be approved and completed” but those odds dipped to 25 percent in the wake of Khan’s letter.
James Taiclet, Lockheed Martin’s chairman, president and CEO, said in late July on the company’s second quarter earnings call that the purchase of Aerojet Rocketdyne will help the company and industry better meet “future national security and civil space objectives when it comes to propulsion,” adding that “We are committed to achieving the key DoD priorities of reducing cost, increasing the quality and speed of new products, in addition to enhancing Aerojet Rocketdyne’s position as a leading merchant supplier to all of the industry.”
Khan said she shares Warren’s “skepticism about the efficacy of behavioral remedies” in protecting competition in vertical mergers. She went on to say that “Indeed, both research and experience suggest that behavioral remedies pose significant administrability problems and have often failed to prevent the merged entity from engaging in anticompetitive tactics enabled by the transaction.”
Khan also said that the FTC and Department of Justice prefer structural remedies, such as requiring divestitures, before approving acquisitions but that even these “may prove inadequate in the face of an unlawful merger. In light of this, I believe the antitrust agencies should more frequently consider opposing problematic deals outright.”
Later in her letter, Khan elaborated on her skepticism of behavior remedies as a means to preserve competition.
“This is especially true for vertical mergers involving large firms with substantial market power at one or more levels of the supply chain,” Khan wrote. “The larger the market share, the higher the risk that a vertical merger will result in a reduction of competition post-merger. For that reason, I prefer structural remedies that prevent the harmful integration of assets, or would support the Commission moving to block the merger altogether.”
Warren had asked the FTC on whether it had ever done post-deal reviews of vertical acquisitions in the defense industry and Khan replied that to her knowledge never.
Aerojet Rocketdyne is a major supplier to both Lockheed Martin and Raytheon Technologies Corp. [RTX] for propulsion systems. Greg Hayes, RTC’s CEO, earlier this year raised concerns about the proposed deal given that Aerojet Rocketdyne is a key supplier for his company’s missile programs.
Lockheed Martin last December announced its proposed $4.4 billion acquisition of Aerojet Rocketdyne. The rocket supplier had $2.1 billion in sales in 2020.