L3Harris acquisition will likely face smoother US antitrust path for Aerojet than Lockheed deal

L3Harris’ proposed acquisition of Aerojet Rocketdyne will likely face a smoother path with US antitrust regulators than Lockheed saw last year.

The deal’s lack of overlaps or products in the same supply chain favors approval, but the Biden administration is taking a broader look at concerns in transactions in consolidated industries, so the parties will need to convince regulators conglomerate concerns aren't a factor.

The US Federal Trade Commission blocked Lockheed’s proposed acquisition of Aerojet last January alleging the acquisition would have eliminated the country’s last independent supplier of key missile propulsion inputs and given Lockheed the ability to cut off its competitors’ access to these critical components — a vertical concern. Agency officials also cited concerns with further consolidating markets critical to national security and defense.

Defense deals are reviewed by the Pentagon and either the FTC or Department of Justice, which split up the antitrust review of defense mergers. It isn’t yet known whether the FTC or the DOJ is the agency that will review the L3Harris-Aerojet transaction.

The Lockheed challenge was the agency's first litigated defense merger challenge in decades.

There’s a lot of deference between the Department of Defense and the antitrust agencies, because if the DOD backs a defense merger, it’s hard for the FTC or DOJ to make a case against it, since the DOD is often the company’s only or primary customer. Plus, antitrust officials are unlikely to have high-enough clearances to question Defense officials who want deals cleared for reasons of national security.

National security rationales for deals can include situations where the DOD fears that without a merger, the target company could fail and leave the Pentagon without a supplier of a critical defense component.

However, DOD priorities today may differ from those during prior presidential administrations. The Biden administration’s DOD previously announced its intention to combat consolidation in the defense industry and released a report in February 2022 about how it aims to accomplish that goal. It’s also possible that Biden’s FTC or DOJ might be a bit less deferential to the DOD than antitrust authorities have been in the past.

Aerojet makes rocket motors and it’s an important defense supplier, particularly now that the US’ aid to Ukraine’s war with Russia has greatly enhanced demand for missile production.

L3Harris is a technology company that makes defense electronics, fuses, sensors and night vision equipment used in weapons. So the two companies operate in different segments of the market, despite both being in the defense sector.

Because the product lines are so distinct, it makes no economic sense to bundle Aerojet systems with those of L3Harris to get an advantage in the market and exclude rivals — a common conglomerate concern.

Conglomerate concerns

Antitrust agencies are increasingly looking at transactions that, despite lacking overlaps or creating a vertical integration, could raise antitrust issues by combining several products or services under one umbrella.

Such concerns, known as conglomerate or portfolio concerns, can arise if the merging company raises the barriers to entry to rivals, which don’t have the same portfolio to be able to compete; if the company only sells the products in bundles, offering discounts to customers that buy multiple products at once; or if it ties products technically and degrades interoperability between the merged entity’s products and competing products in favor of the merged entity’s own downstream product.

Antitrust officials are also looking at whether the merged company could leverage its market power in one market over a neighboring one, excluding rivals in that second market.

The agencies are aiming to fight the creation of conglomerates, particularly in the tech sector where Big Tech companies have been acquiring smaller companies and acquisitions that have flown under the radar but may now raise concerns.

It’s less likely that conglomerate power will arise in the review of defense deals, considering the government is most times the companies' main customer, but there are still calls to fight consolidation.

Massachusetts Democratic Senator Elizabeth Warren, a vocal opponent of Lockheed’s takeover bid, said she would be scrutinizing the deal.

“Further corporate consolidation in the American defense industry raises both antitrust issues and national security concerns. As a Senate Armed Services Committee member, I opposed Aerojet’s previous failed deal and continue to closely monitor antitrust enforcement against defense contractors,” Warren said in a statement.

The American Economic Liberties Project, an antitrust advocacy group, said the transaction is a “case of deja vu.” The group said antitrust enforcers did the right thing last time, blocking an acquisition of Aerojet by a major prime contractor, and they should do it again.

“A massive defense contractor purchasing the last independent solid fuel rocket maker will only further consolidate the supply chain — and was even a specific example in the Pentagon report of an overly consolidated sector.”

But in terms of size for consolidation issues, L3Harris' considerably smaller size compared to Lockheed should help dissuade concerns from antitrust officials. Lockheed's 2022 revenue guidance was $65.25 billion, versus L3Harris’ $16.83 billion. Even though revenue size doesn’t always translate to dominance in a sector, L3Harris is still much smaller than the top-five US military contractors.

DOD’s call

Ultimately, it will be the call of defense officials whether the deal is in the interest of national security.

If the transaction will create a stronger company to compete in the defense sector, the Pentagon is likely to support the deal.

“We’ve heard the DoD leadership loud and clear: they want high-quality, innovative and cost-effective solutions to meet both current and emerging threats, and they’re relying upon a strong, competitive industrial base to deliver those solutions,” said Christopher E. Kubasik, L3Harris' chief executive and chair.

“The acquisition will ensure the defense industrial base and our customers will have a strengthened merchant supplier to effectively address both current and emerging threats – and promote scientific discovery and innovation – through targeted investment in advanced missile technologies, hypersonics and more,” the company added.

Keeping Aerojet as a neutral merchant supplier was a sticking point in the Lockheed challenge, and contrasts with L3Harris’ current commitment to be a neutral merchant supplier of several technologies.

But one precedent case that may worry antitrust authorities and the DOD is the Northrop-Orbital ATK merger, which was allowed to clear on the basis of behavioral remedies that some government officials subsequently deemed ineffective.

—With assistance from Ilana Kowarski.