We are driven by our mission to advocate for sensible regulatory and public policy decisions that are made in the best interest of the American people, specifically when it comes to antitrust and anti-competitive issues. We are committed to educating decision makers and encouraging them to take a hard look at the consequences that monopolies in the defense industry have for our national security.
The Impact of Monopolies
Competition is key to innovation in any industry, and especially in defense. A vertically integrated merger that allows a company to dominate market share is highly problematic.
With any massive corporate merger, there can be mass layoffs. Right now, the United States is already experiencing a skyrocketing unemployment rate. We should be cautious about mergers that reduce competition and can cause massive job losses.
When proposed mergers threaten to stifle innovation, this is highly problematic – especially when it comes to our national defense. Innovation in our defense sector can win battles and wars, while keeping members of our armed services safe.
With China and Russia making large investments in missile technology, it is imperative that the United States addresses this threat. Any potential mergers that reduce competition and innovation in the defense sector should be a cause for concern.
Current Antitrust Concerns
The proposed merger between Lockheed Martin and Aerojet Rocketdyne
In December 2020, defense contractor Lockheed Martin announced its plan to purchase and merge with Aerojet Rocketdyne in a $4.4 billion deal. While Lockheed Martin touts this acquisition as a strategic move to bolster our nation’s defense, in reality, it creates a serious problem because it may eliminate any real competition for the development of new missile technology -- particularly in hypersonics.
This is because Lockheed Martin is not the only contractor that Aerojet provides propulsion technology to; Lockheed, Boeing, Raytheon Technologies and Northrup have all partnered with Aerojet for their technology.
Aerojet is the sole provider of Divert and Attitude Control Systems (DACS), which is a high-precision, quick-reaction propulsion system that positions the interceptor to successfully defeat an incoming ballistic missile.
In 2017, Aerojet was chosen to “provide the main propulsion for the Boeing and the U.S. Defense Advanced Research Projects Agency (DARPA) reusable Experimental Spaceplane (XS-1),” according to a press release on the company’s website.
Aerojet provides the majority of solid rocket motors for Raytheon’s standard missiles, including the SM-2 missile, SM-3 interceptor and SM-6 missiles.
Right now, the deal is in the process of approval by the Department of Defense (DoD) and Federal Trade Commission (FTC). The FTC, DoD and the appropriate Congressional Committees must take a hard look and determine if this merger means that the competitors to Lockheed will no longer have access to Aerojet propulsion motors that are vital to our nation’s precision weapons.
If this potential merger is approved, multiple companies that provide the bulk of our nation’s defensive and offensive missile technologies will be forced to rely on Lockheed Martin for critical rocket propulsion components. This anti-competitive dynamic should raise red flags for regulators.
Thankfully, in June 2020, the FTC and DOJ issued new guidelines for evaluating vertical mergers, stating: “These new Vertical Merger Guidelines are an important step forward in maintaining vigorous antitrust enforcement, and reaffirm our commitment to challenge vertical mergers that are anticompetitive and would harm American consumers.”
The Lockheed Aerojet merger clearly challenges these guidelines; for that reason, the FTC and DoD must consider the implications of a Lockheed Aerojet merger.
Big Tech Mergers
Understandably, all eyes are on Big Tech right now, as the industry faces intense scrutiny for antitrust concerns. In February 2021, Sen. Amy Klobuchar announced legislation to stop mergers that "create an appreciable risk of materially lessening competition." Four companies – Amazon, Apple, Facebook and Google, currently have a combined market value of more than $5 trillion.
"Many technology giants and their executives have not only abused their power, but misled the American people, damaged our democracy and evaded any form of responsibility. That ends with a President Biden."
- Biden campaign spokesperson Matt Hill, The New York Times
An investigation and report by the U.S. House antitrust subcommittee found that Amazon has “has monopoly power over most third-party sellers and many of its suppliers.”
That same investigation found that Apple holds about 45 percent of the market for smart phones in the United States and its monopoly power allows them to generate large profits and “extract rents from developers.”
In 2012, Facebook purchased Instagram, which at the time of the acquisition had 30 million users for $1 billion. In 2014, the company purchased WhatsApp, which had 450 million monthly active users at the time, for $19 billion.
In October 2020, the U.S. Department of Justice filed a lawsuit saying that “unlawfully boxed out competitors by reaching deals with phone makers, including Apple and Samsung, to be the default search engine on their devices.” Google processes about 90 percent of all online searches in the country.
"With no restrictions of tech companies to own and compete on their own platforms, which are the only options for so many small businesses, it takes away any real sense of competition."
- Rep. Pramila Jayapal (D-WA), The New York Times
Past is Prologue: Mergers Gone Wrong
Mergers can, and have, gone wrong, leading to intervention by federal regulators. While most monopolies calling for government intervention are about protecting consumers and ensuring competition, we must also recognize the growing issue of antitrust in the defense industry, where a monopoly can undermine our national security and the safety of the war-fighter.
“The number of vendors receiving prime contracts from the Department of Defense dropped in all by 17,000, or nearly 20 percent over the drawdown period.”
A few examples demonstrating the unintended consequences of defense industry mergers should serve as cautionary tales for the FTC.
EXAMPLE 1: AOL and Time Warner
One of the most infamous mergers in recent U.S. history is that of AOL and Time Warner. In 2000, AOL, a company that was once a giant in the tech industry, purchased Time Warner for a total of $164 billion. Not only were the cultures and leadership of the combined companies cause for disaster, but due diligence clearly was not practiced in the assessment of the deal.
Just two months after the merger was finalized, the dot-com bubble burst and the company’s value plummeted. In 2002, the combined company reported a quarterly loss of $54 billion, and months later hit a $98 billion loss.
Total subscribers of AOL decreased from 30 million to just over 5 million.
The catastrophic merger led to the fleeing and laying off of executives, and eventually a spin-off company only a few years later.
EXAMPLE 2: Northrop Grumman and Orbital ATK
The best example showing the negative impacts of a defense monopoly happened as recently as 2018, when Northrop Grumman acquired Orbital ATK. Prior to this merger, Orbital ATK and Aerojet Rocketdyne were the sole independent providers of propulsion motors.
As a direct result of this merger, Northrop won the $80 billion Ground-Based Strategic Deterrent (GBSD) program.
Boeing, the program’s incumbent, was not able to compete.
Because Boeing had no choice but to drop out of the competition, the Federal Trade Commission (FTC) is now investigating Northrop Grumman to see whether they “acted in restraint of trade and violated an order requiring the company to sell its solid motor rocket engines on “a non-discriminatory basis to all competitors for missile contracts.”
This investigation was opened in October 2019 and is still active.
EXAMPLE 3: United Launch Alliance and SpaceX
We also saw the negative impacts of removing competition in the defense industry in 2006, when the U.S. government permitted the formation of Lockheed Martin and Boeing's United Launch Alliance to support all medium-to-heavy USG launches. Prior to this, these two companies competed for space launch missions.
ULA triggered two Nunn-McCurdy cost breach notifications, as costs increased 100 percent, even though launches only increased by 59 percent.
Prices were not reduced until competition was reintroduced, in the form of SpaceX. When SpaceX entered the competition and offered much lower costs, ULA was then able to decrease its price by $80 million.
In 2016, POLITICO reported that "taxpayers will be paying the price for ULA's contracts for years to come," even with the introduction of SpaceX, because it is completing launches that were awarded to ULA before SpaceX was allowed to compete with lower cost alternatives.
A 2014 GAO report noted that "minimal insight into contractor cost or pricing data meant DOD may have lacked sufficient knowledge to negotiate fair and reasonable launch prices."