Pentagon Stupidity Is a Design Choice
In the National Defense Authorization Act, Congress just empowered the Pentagon to learn who owns the defense contractors that supply it. This is good for national defense and bad for private equity.
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Today’s piece is short. It’s about two useful provisions that Congress quietly slipped into a major defense bill. These new legal requirements will force private equity firms to tell the Pentagon whether they are mucking around with weapons makers.
These provisions are especially important at a moment when the U.S. is supplying, or failing to supply, three areas of possible conflict - Israel, Ukraine, and Taiwan.
Seeing Like a Pentagon
Using metaphor of blindness to sight is common throughout human history, because everyone understands what it means to open your eyes. It suggests not just a change in the ability to sense light, but a step change in how we think. “I was blind but now I see” is in the bible, a metaphor for seeing a spiritual truth, being able to reckon with the profundities of reality. In “Seeing like a State,” James C. Scott conveys a similar notion for bureaucracies. How a state collects information, aka sees, is a highly political question, because you can’t govern what you can’t see.
In August, I wrote up an important shift among antitrust enforcers, in a piece titled “Government Stupidity Is a Design Choice.” In it, I described how the Federal Trade Commission and Antitrust Division, prompted by Congress, tweaked a form, called the Hart Scott Rodino form, that companies must fill out when they want to engage in any corporate acquisition worth over $100 million.
Dealmakers will now have to answer basic questions, such as “Why are you merging?” “Who is on your board of directors?” “How does your industry work?” “Who is lending money for the buy-out?” They will have to give information upfront about subsidiaries, their product lines, defense contracts, their power in labor markets, and previous acquisitions, which is particularly important when a firm is rolling up a lot of smaller entities. If China is financing the bid, or a giant private equity firm, they will now have to tell the government.
The old form required none of this. The government got virtually no useful information from it, meaning that every day a government lawyer would receive a bunch of notifications that two random companies are merging, and he’d have to start with virtually no information, and then with a few hours of research decide which were worth investigating. No matter how smart you are, no one can learn a lot about, say, the paint industry, the mail sorting software industry, the pool cleaning industry, and the semiconductor design industry in one day starting from zero. So a lot of unlawful mergers just went through, because the government was blind.
The old form was the equivalent of being told to do an X-Ray and being given cardboard X-Ray glasses from the 1950s. The new form is an actual X-Ray machine.
While the new form hasn’t gone into effect yet, it will be very effective. How do I know? Well the big D.C. and New York corporate law firms that advise all large companies, private equity funds, foreign governments, and large institutions were absolutely furious about the shift. (Here are, for instance, angry notes to clients from Wilmer Hale. Steptoe. Kirkland and Ellis. Dechert. Wilson Sonsini. Sullivan and Cromwell. Covington & Burling. Etc.)
But while corporate lawyers might be mad about this change among antitrust enforcers, now they’ll have to deal with another part of the government getting that same X-Ray machine. The Pentagon.