

Discover more from BIG by Matt Stoller
Sometimes Antitrust Is Rocket Science
With the FTC challenging the Lockheed-Aerojet merger, 30 years of consolidation could be at an end.
Welcome to BIG, a newsletter on the politics of monopoly power. If you’d like to sign up to receive issues over email, you can do so here.
Last Tuesday, the Federal Trade Commission, with support from the Pentagon, challenged the $4.4 billion merger of Lockheed Martin and rocket motor maker Aerojet. Lockheed is the largest defense contractor in the world, with $65 billion in sales, three quarters of which comes from the U.S. government. Aerojet has $2 billion sales, almost all of which goes directly or indirectly to the government. These aren’t direct competitors, Aerojet is a supplier to Lockheed, which means the merger is known as a ‘vertical’ deal, versus a ‘horizontal merger in which rivals mergers. Vertical merger challenges have traditionally been unusual, but that’s changing. In this case, all four FTC Commissioners voted to bring the challenge, which means both Republicans and Democrats objected to the deal.
For thirty years, the defense industry has been on a binge of acquisitions, and this merger was to be the latest iteration of it, with a particular focus on consolidating control of the contract for the newest strategically important weapons system family, hypersonic missiles. Since 2020, the number of firms capable of producing solid rocket missiles consolidated from six to two firms. Nevertheless, this merger challenge was a shock to Wall Street, with Aerojet’s stock dropping by 20% on the news. And there are significant broader implications - positive ones - to the defense base.
Lockheed is what is known as a ‘prime contractor,’ which is to say it signs big deals with the Pentagon for complex weapons, and then subcontracts the component parts with specialty firms to make specific components. In this case, Aerojet produces missile propulsion systems and components for “missile rounds and/or missile systems ("missiles"), missile defense kill vehicles ("KVs"), and/or hypersonic cruise missiles ("HCMs").” Lockheed competes in this market with other primes like Raytheon, Boeing, and Northrop, who also all work with Aerojet.
The FTC objected to the merger because it claims that if Lockheed buys Aerojet, it will then deny its competitors access to Aerojet’s technology, thus giving itself a leg up on key contracts. The FTC noted in its complaint that Lockheed has already tried to prevent other primes from getting access to “Critical Propulsion Technologies,” but did not succeed, because it did not control Aerojet. A secondary claim is that if Lockheed buys Aerojet, it can then focus Aerojet’s designs on only being compatible with Lockheed systems, whereas right now, it is competitively neutral. Finally, Lockheed would also be able to use sensitive data Aerojet has on Lockheed competitors to enhance its bidding strategies.
Lockheed’s argument on behalf of the merger would probably have been that it will be able to efficiently build hypersonic missiles, a new kind of missile technology that China and Russia have moved ahead on. Amusingly, Lockheed CEO James Taiclet discarded that argument to investors on an earnings call almost immediately.
Taiclet offered assurances the company’s hypersonic weapons development strategy remains on firm footing.
“We think we could have gotten a speed and efficiency increase by the partial vertical integration on hypersonics through the [Aerojet] acquisition specifically, but we can still manage it whichever way that deal turns out,” he said.
That’s pretty much throwing in the towel, as far as I can tell.
But of course, the challenge isn’t just about Lina Khan at the Federal Trade Commission blocking a defense merger, it has to do with one of the more powerful areas of governance, the military. And with this challenge, which was sanctioned by the Pentagon, it seems the military has turned on consolidation. And that’s a big deal. When the Cold War ended, the Clinton administration sought to radically consolidate the defense base, with the Pentagon explicitly financing and encouraging a merger wave to shrink the number of prime contractors from roughly 100 to 5. The idea is that the primes wouldn’t oppose reducing defense spending in the post-Cold War environment, as long as they got to make it up in higher margins from less competition.
And since then, mergers have been commonplace. And the effects are clear. As of 2020, nearly two thirds of DoD major weapons system contracts had only one major bidder, and the top 10 aerospace and defense companies accounted for 86 percent of industry revenues. All the signs of monopolization - high prices, poor quality, bad service - are now showing up at the Pentagon. A few years ago, Northrup bought Orbital-ATK, which also made independent rocket engines. Shortly thereafter, despite a consent decree with the FTC, Northrup denied access to rocket engines to Boeing, its competitor for the ICBM nuclear upgrade. As a result, Northrup has a sole source contract, a point highlighted by, among others, anti-monopolist Elle Ekman in the American Conservative.
One result is that the anti-monopoly movement has begun to penetrate the Defense Department, as I wrote last February.
In 2018, the Defense Department released a study lamenting the loss of over 20,000 suppliers since 2000, and observing that “a surprising level of foreign dependence on competitor nations exists” for a whole host of critical products. Just a few months ago, the Pentagon sent Congress a groundbreaking report on how Wall Street is destroying the defense base. “A U.S. business climate,” it read, “that has favored short-term shareholder earnings, deindustrialization, and an abstract, radical vision of ‘free trade,’ without fair trade enforcement, have severely damaged America’s ability to arm itself today and in the future.” Keep in mind that this is not some advocacy group calling for fair trade or criticizing short-term shareholder profiteering, it’s the Pentagon.
Despite the anodyne bureaucratic wording, the level of alarm at how private equity and mergers have weakened productive capacity was evident, with the report asserting that “The number of cases where there is just one – often fragile – supplier is staggering. This is a deterioration from a decade ago when 3 to 5 suppliers existed for each component, let alone several decades ago when the military generally enjoyed dozens of suppliers for each item.”
In 2019, Lucas Kunce and I wrote a piece that went viral in national security circles, titled America’s Monopoly Crisis Hits The Military. Senators Elizabeth Warren and Richard Blumenthal, as well as Rep. Mark Pocan have put pressure on defense mergers. The Biden national security team recognizes problems with defense consolidation, and the current Deputy Secretary of Defense - Kathleen Hicks - told the Senate Armed Services Committee of her concern with consolidation at her confirmation hearing. In July, Biden issued an executive order on competition policy, with specific instructions for the Pentagon on competition, and Hicks is the Pentagon official on the White House Competition Council set up by that order. Moreover, Congress is getting more interested, and has put provisions into DOD authorizing legislation encouraging investigations into the problem of market power in the defense base.
It’s not completely clear to what extent this challenge changes the calculus for defense mergers, but it does seem significant. Here’s the headline in the Wall Street Journal, just a few days ago.
Sometimes Antitrust Is Rocket Science
"Increase shareholder value" one of the most destructive concepts in human history. I work for a company that provides products to the government. When I started (mid-2000s), it was a 400 person company working mostly direct to gov't and to some primes. It grew to a 600 person company, and doing well. We were efficient, liked our jobs, focused on the products and innovation, and solving tough technical problems. An engineering company. But business people gained footholds of power (stemming from the cardinal but lucrative sin of 'going public' a decade or so earlier). Sold to a large defense contractor, we became a small voice among hundreds. Our processes didn't match. We were agile with our customers, but to the prime that bought us, we were "cowboys" to be tamed that didn't do things rigorously or carefully enough. After over a decade of process, taming, and control, we are far less efficient and productive. IT issues are commonplace, turnover is way up. Resources to create and test products and innovate are very hard to come by and take unreasonable efforts to secure. Customers are still with us because there's nowhere else to go, even though we're not as good as we once were. More than a few of us wished to break off and form a competing firm, get back to focus on the products, the technology, but the very high capital investments and fear of litigation stopped people from taking the leap. Recently, the giants that consumed us have themselves been consolidating - L3 merging with Harris, Raytheon with United Technologies, etc. Even companies like Parsons Corporation, which have acquired over a dozen companies in the last decade, seem small compared to these giants. Where 20 years ago our competitors were often other small companies, now most are gone. Instead of having 400 coworkers I have many tens of thousands of coworkers. Seeing it from the inside has been very eye opening, and I have seen our productivity drop not by a little but by half in some technology areas. Partly by the bureaucracy that creeps in, partly by the lack of competition, partly by the loss of our best people who want to innovate and create - and found they could no longer do it here. I have seen no evidence in all my time in this industry that acquisitions and mergers have helped employees, the government, our military, or the American people as a whole. I have seen ample evidence that it has decreased choice and productivity, increased prices, demotivated employees, and only lined the pockets of two groups of people: Executives so rich they already don't know what to do to hold all their money, and those of other stock shareholders (in other income brackets) that don't even know what the company actually does let alone contribute to it.
Excellent news that the military is finally starting to understand (again) the dangers of letting Share Value control the world. In WW2 the military tried hard to keep smaller companies in the game, and a lot of smaller companies survived because of this effort.