When Lockheed Martin bought military contractor Sikorsky Aircraft in 2015, the Obama administration’s defense chief readily admitted that too much consolidation in the industry would drive up prices for taxpayers.
That is one policy stance that didn’t change when President Trump moved into the White House, a point the president made clear when discussing missile-maker Raytheon’s takeover by United Technologies, the same conglomerate that sold Sikorsky.
The advantages for the two firms, which become “one big, fat beautiful company,” in Trump’s words, are obvious, but as the president told financial news network CNBC, “I have to negotiate, meaning the U.S. has to buy things. Does that make it less competitive? Because it’s already noncompetitive.”
Winning approval for the transaction from regulators, which will include a Defense Department evaluation, will require assuring the administration that the answer to Trump’s question is negative. It also means overcoming increasingly entrenched skepticism that the benefits of such mergers extend beyond the combined company.
“This deal is bad for national security, bad for the taxpayer, and bad for the American soldier,” said Barry Lynn, executive director of Open Markets, an organization fighting anti-competitive behavior among U.S. companies.
Allowing the transaction to move forward at a time when China is upgrading its military and technological capabilities makes little sense, the organization maintained, urging Congress to begin countering what it views as monopolization in the industry.
“We do need a competitive marketplace to the extent that’s possible in the defense industry,” then-Defense Secretary Ash Carter observed in 2015, noting that mergers among prime contractors weren’t “good for the defense marketplace and, therefore, for our taxpayers and warfighters.”
Three years later, a September 2018 Defense Department report assessing U.S. manufacturing capability cited several examples of mergers that left the military dependent on only a few suppliers for equipment from planes to land vehicles, noting they could become chokepoints in cases of immediate need.
“Decreases in key production capabilities and declines in manufacturing employment, relative to the last time the U.S. faced a great power competition, left key weaknesses that threaten the nation’s manufacturing capabilities,” according to the report, commissioned by Trump during his first year in office.
America’s shipbuilding industry, for example, now consists of seven shipyards operated by four companies and their suppliers, a challenge for the 355-vessel U.S. Navy. The aircraft industry consolidated sharply during the 1990s as government purchases waned.
The Pentagon declined to comment on how it would go about assessing the Raytheon merger’s effects on defense industry competition or how long the process might take. Enhancing U.S. military strength has been a priority for Trump, who convinced lawmakers to raise spending to $700 billion in the 2018 budget year and $716 billion in 2019, but still worries about inflated prices from deals like Raytheon’s.
Undersecretary of Defense Ellen Lord “is engaging with industry leadership to understand the implications,” said Lt. Col. Mike Andrews, a Defense Department spokesman.
United Technologies CEO Greg Hayes and Raytheon CEO Thomas Kennedy, who met with Trump shortly after the merger was announced, are confident they can prove its benefits to the government.
“From a regulatory standpoint, the beauty of this deal is that there’s very little overlap,” Hayes said, estimating that less than 1% of a combined $74 billion in annual sales intersect. “We truly believe that we’re going to get this done relatively quickly, and our goal right now is to have regulatory approval by the first quarter of next year.”
Under the agreement, United Technologies’ aerospace business — which includes engine-maker Pratt & Whitney and aircraft parts manufacturer Rockwell Collins, the firm that Hayes purchased for $30 billion last year — will combine with Raytheon to create a new company called Raytheon Technologies.
Raytheon shareholders will control 47% of the firm, with United Technologies investors holding the remainder. Hayes announced plans to spin off United Technologies’ other businesses, Otis elevators and Carrier air conditioners, in late 2018.
The Pentagon “is sensitive to contractors amassing significant power, but on the military side, Raytheon Technologies will still be significantly smaller than Lockheed and doesn’t really become any more dominant in specific areas than either company as independently,” said Seth Seifman, an analyst with JPMorgan Chase.
Not only do the two CEOs think they can steer clear of anti-competitive concerns, they say the merger will fuel investment in new weapons and systems that the Pentagon has sought under Trump’s administration as rivals like Russia tout weapons including a nuclear missile that President Vladimir Putin says can pierce U.S. defenses.
The new company will command $8 billion in research and development spending, employ 60,000 engineers, and possess 38,000 active patents, Kennedy said.
“We are seeing a significant push by the Department of Defense in the area of modernization,” he said, and the new company would have an edge in developing interceptors for hypersonic missiles, which travel at faster than five times the speed of sound, and directed-energy weapons like lasers.
There’s “a need for even more technology and the ability to go and invest in technology to go create these next-generation franchises,” Kennedy said.
“The complementary technologies that United Technologies has just fit almost perfectly in with the technologies that we need to continue to drive the modernization side of our business,” he added. “That was just a natural fit. And I think it does make us a much more resilient company moving forward.”
