Lockheed Martin’s proposed acquisition of the rocket engine maker Aerojet Rocketdyne for $4.4 billion is now shrouded in complexity after the Federal Trade Commission (FTC) Chairperson Lina Khan expressed fears about vertical mergers, in which a large corporation strives to obtain a major supplier.
Senator Elizabeth Warren (D-Mass.) received a letter from Khan on August 6 outlining his views on military sector consolidation. Warren is opposed to the Lockheed-Aerojet acquisition and has been a vocal opponent of defense sector consolidation for a long time.
Raytheon Technologies, which has its headquarters in Warren’s home state of Massachusetts, has stated that it will challenge the merger. The engines developed by Aerojet Rocketdyne are utilized by both Lockheed Martin and Raytheon in the tactical and strategic missiles that they manufacture for the United States Department of Defense.
The Federal Trade Commission (FTC) and the Department of Justice (DoJ) are in charge of evaluating mergers in the defense sector, and they have the authority to halt them if they establish that the combination of businesses results in a significant reduction in competition or the creation of a monopoly in the market. As per the Khan’s letter, Warren requested that the panel “re-evaluate the most effective strategy to preserve fair competition when assessing vertical mergers.”
The letter’s contents, which were sent on August 6, were first published by Bloomberg News. According to Lockheed Martin, the merger must follow the same model as Northrop Grumman’s acquisition of the solid rocket motor producer Orbital ATK in 2018. Even though regulators permitted the Northrop-Orbital merger, the corporation was required to execute “behavioral remedies.” It was under that situation that Northrop was compelled to pledge to provide motors to its rivals.
Lockheed Martin stated that if the purchase of Aerojet is authorized, the business will also provide propulsion products to the entire industry. “I am pessimistic that purely behavioral remedies will be adequate to stop a vertical merger from inflicting harm,” Khan wrote in his article. In particular, vertical mergers involving major corporations with significant market strength at one or even further stages of the supply chain are problematic. Accordingly, the greater the market share, the greater the likelihood that the vertical merger would result in a loss in the competition following the merger.”
The Department of Defense has not remarked on the merger. Therefore, its view is now unknown. Considering the Department of Defense is the major (and in many cases the only) client for most products and services offered by defense companies, Khan explained that the Department of Defense plays an essential advisory role in Commission’s (or DOJ’s) evaluation of proposed defense mergers. But it is the antitrust authorities that ultimately assess whether a deal should be contested, and DoD permission is not needed prior to the transaction’s completion.