Federal regulators on Tuesday issued an unusual warning about the perils of defense industry consolidation, noting the importance of competition to keeping prices down.
“Many sectors of the defense industry are already highly concentrated. Others appear to be on a similar trajectory,” according to a joint statement from the Justice Department and Federal Trade Commission, which must approve large proposed mergers or acquisitions.
“If a transaction threatens to harm innovation, reduce the number of competitive options needed by [the Department of Defense], or otherwise lessen competition … [regulators] will not hesitate to take appropriate enforcement action.”
The statement did not mention any specific companies or potential mergers and follows similar statements last year from Frank Kendall, the Pentagon’s chief weapons buyer. At the time, Kendall said his concern was sparked in part by Lockheed Martin’s acquisition of Sikorsky, a leading military helicopter manufacturer. Bethesda-based Lockheed is the world’s largest defense contractor and the Sikorsky deal made it even bigger.
“The Department of Justice is committed to preserving competition for current and future defense procurement,” Bill Baer, the head of the Justice Department’s antitrust division, said in a statement. “In light of recent speculation about possible future consolidation, we thought it timely to reinforce that message.
Government spending on defense has slowed sharply since the recession, hitting contractors hardest as the Pentagon has focused on shielding its military personnel and war-fighting accounts from significant cuts. That has forced the defense industry to make wrenching choices. Some have gone looking for business overseas or in the commercial sector. Others have broken themselves up and sold parts. Some have merged.
Many of the biggest defense giants have seen profits improve in the past year or so after years after a series of job cuts and realignments. But defense industry officials have continued to downplay concerns about too much industry consolidation, arguing that the slowdown in Pentagon spending made some deals necessary.
“The main reason defense companies are getting together is that spending on military hardware has been depressed for years,” Loren Thompson, a defense consultant with the Lexington Institute, said in an email.
“Not only is the Pentagon budget capped, but the Obama Administration has made weapons programs a bill-payer for other types of Pentagon spending like personnel and readiness.”