DOD's one-man antitrust office focuses on competitive effects in key defense markets, military readiness
18 September 2017. By Curtis Eichelberger.
Scrutiny in antitrust mergers isn't always isolated to the traditional antitrust agencies. The high bar often comes from a little-known, one-person office in the Department of Defense that analyzes deals to see if they will reduce competition in key defense markets, or harm US military readiness.
The Manufacturing and Industrial Base Policy Office's analysis is similar to the Department of Justice's and Federal Trade Commission's, only it focuses on how a merger could reduce or eliminate competition for current and future DOD programs, contracts and subcontracts, and for future technologies of interest to the Pentagon.
The MIBP began reviewing mergers in 1994, and its opposition to a deal can have serious repercussions. For example, the MIBP opposed Lockheed Martin's proposed $8.3 billion acquisition of Northrup Grumman in 1997, and Lockheed Martin eventually walked away from the deal.
The MIBP is currently reviewing United Technologies' proposed $30 billion acquisition of Rockwell Collins and Northrop Grumman's proposed $9.2 billion acquisition of Orbital ATK.
Steve Hull, who retired as director of the MIBP's M&A office this summer, said when the MIBP objects to a merger, the companies often walk away. But like the DOJ and FTC, the Pentagon isn't necessarily trying to kill deals. Divestitures and other remedies often resolve competitive issues, he said. And while the MIBP provides its own analysis, only the FTC and DOJ have the authority to bring a case; the Pentagon can't block a merger by itself.
"(The agencies) don't fall over themselves to do what we want," Hull said. "We mutually look at a transaction. But when we say we don't support a merger, that gives the DOJ and FTC a good customer who is willing to step forward, provide data and other evidence, and take the witness stand."
The MIBP reviews each merger on its own merits, but it has also expressed concern that consolidation is becoming a threat to competitiveness and innovation in the military industrial complex.
The Office of the Deputy Assistant Secretary of Defense for Manufacturing and Industrial Base Policy addressed this issue in its annual report to Congress on June 13. "The Department's reviews have included the consideration of potential impacts on national security, but recent transactions have demonstrated that the current antitrust provisions may be too narrowly constrained. Transaction reviews in 2016 demonstrated that previous concerns regarding the lack of authorities to address national security issues arising from transactions was not an isolated occurrence," the report said.
"The current law only prohibits M&A that are found to lessen competition or which tend to create a monopoly. Potential national security implications associated with a proposed transaction are not considered. Reviewing transactions to assess the national security implications is critical to stewardship of an industrial base structure needed to meet national security objectives. Defense firms are not just other commercial businesses. They provide a critical service to the nation, providing the equipment and support that our armed forces use to ensure the security of our country," the report continued.
The report went on to say that "the trend toward fewer and larger prime contractors has the potential to affect innovation, narrow industrial capabilities and technology, limit the supply base, pose entry barriers to small, medium and large businesses, and ultimately reduce competition, or may otherwise not be in the Department or the public's interests."
The MIBP's acting M&A director is Jonathan Wright, who previously worked as a financial management analyst for Naval Sea Systems Command and was the founding member of the Navy's Portfolio Assessment Team, which assesses supply chain risk, conducts financial health assessments, and provides business analytics.
"I find that the relationship we have (with the agencies) to work together and understand the risk from different perspectives outside competition is unique," said Wright, who has been on the job six weeks. "I've found that the antitrust regulators are really helpful and sympathetic to making sure the DOD's interests are taken seriously."
"Asking what programs and office and capabilities could be impacted and looking at how this could play out downstream. They lean on us to make sure they are getting the right information to make those decisions," Wright said. He declined to comment, however, about the United Technologies or Northrop Grumman deals.
The MIBP often sits in on agency interviews with the merging companies and competitors, and can request briefings distributed to a company's board and other internal documents from the companies themselves.
The agencies depend on the MIBP to provide subject matter experts and to give its opinion on the merger's impact on current and future defense markets and MIBP programs, organizational conflicts of interest and a deal's impact on costs and savings.
In 2016, the MIBP completed 12 reviews of significant transactions out of the approximately 380 defense-related M&A over the course of the year, according to the government. They included:
- Leidos' $4.6 billion acquisition of Lockheed Martin's Information Systems & Global Solutions in a tax-free Reverse Morris Trust merger.
- TransDigm Group's three acquisitions of PneuDraulics, Breeze-Eastern and Data Device Corp., "which continued the company's model of purchasing aerospace and defense firms which hold monopoly or single-source positions on proprietary and highly-engineered components with high barriers to entry, with subsequent price hikes," the government said in its report.
- And Infineon's $850 million acquisition of Cree's Wolfspeed, which fell apart over concerns from the Committee on Foreign Investment in the United States. MIBP handles the DOD's Cfius reviews. The DOD called Cree a "crown jewel" industrial base partner; a critical merchant supplier of high-purity Silicon Carbide wafer substrates and finished products using specialized Epitaxy for defense RF and Power applications.
In 2015, the Department completed 12 reviews of significant transactions out of the approximately 370 defense-related M&A over the course of the year. They included Thai Union's proposed acquisition of BumbleBee, which was blocked; Orbital's acquisition of ATK; Harris' acquisition of Exelis; and Lockheed Martin's acquisition of Sikorsky, the largest defense transaction since the 1990s.
As markets become more consolidated, the MIBP is expected to become even more critical to the antitrust agencies' task of sorting out competition concerns, some of which have impact well beyond whether they harm consumers' wallets.