• U.S. DOJ and FTC Promise Pentagon Aggressive Antitrust Enforcement in Defense Mergers
  • May 10, 2016 | Authors: Kathryn M. (Kathy) Fenton; Peter J. Love; Laura E. Malament; J. Bruce McDonald
  • Law Firms: Jones Day - Washington Office ; Jones Day - Houston Office
  • In September 2015, the Antitrust Division of the U.S. Department of Justice approved Lockheed Martin's $9 billion acquisition of Sikorsky Aircraft, without even issuing a Second Request. Though the Department of Defense supported the combination, DOD immediately issued a warning that it would not look favorably on mergers of the biggest defense firms and would seek legislation bolstering its ability to fill any gaps in existing antitrust law. Last week, with the threat of DOD seeking legislation to expand its role in the review of defense industry mergers, the antitrust agencies issued a joint statement on preserving competition in the defense industry. The joint statement by DOJ and the Federal Trade Commission highlights the effectiveness of antitrust enforcement, their own enforcement readiness, and their intent to rely on DOD's views as the chief customer in defense sectors.

    Defense industry antitrust merger review

    The joint statement emphasizes the role that DOD plays in the DOJ's and FTC's analyses of proposed transactions in the defense industry, as well as the ability of the antitrust agencies to apply traditional merger analysis to specialized defense sectors. The joint statement explains that DOD's mission to ensure the nation's security puts it in a "unique position" to evaluate the impact of potential consolidation. As DOD is often the sole purchaser of the majority of output from the defense industry, the antitrust agencies "rely on DoD's expertise."

    The joint statement notes that many segments of the defense industry are "already highly concentrated" and that other segments are trending that way, leading to a greater need to address anticompetitive trends in their incipiency.

    The antitrust agencies analyze all mergers as described in their own Horizontal Merger Guidelines. Defense industry transactions are no exception, and with those the agencies consider the defense industry's unique characteristics: high barriers to entry, the importance of research and development, and the need for surge capacity, a skilled workforce, and a robust subcontractor base. Further, as much as in any other sector, defense industry merger investigations focus on a transaction's impact on innovation, and whether enough postmerger competitors remain to ensure robust procurement competition.

    DOD role in antitrust merger review

    The threat of legislation may have prompted this week's DOJ and FTC statement; and apparently the statement was effective, as reportedly DOD has withdrawn its legislative proposal. But notwithstanding this skirmish, the antitrust agencies traditionally have consulted closely with DOD in their investigations of defense industry transactions.

    The antitrust agencies take into account that DOD is often the only buyer for the merging parties' products and that DOD procurement is often made on a winner-take-all basis. The agencies define product markets based on the DOD missions for which the products are created. Because defense industry products are used for national defense and war efforts, the antitrust agencies often rely on a nationwide geographic market, only sometimes including foreign suppliers. To determine market shares and participants, the agencies consider the technological capabilities of emerging and incumbent competitors. For all these issues, DOD is in a unique position to assist the antitrust review, given DOD's knowledge of critical missions, the potential emerging competitors whose entry it may encourage, and the technological capabilities of current competitors. In addition, DOD itself sometimes enters into the supply of defense-related products, giving it more insights to share with the antitrust agencies about competition and potential entry. Thus, DOD's views have long been a primary determinant (sometimes a sole determinant) of how the antitrust agencies will proceed in their reviews of defense industry mergers.

    DOD may believe that merger review should consider the policy question of whether the defense firms' overall size and dominance in multiple markets, not just a combination's effect on specific existing programs or markets. Notwithstanding their recent debate, this DOD concern in fact dovetails with recent DOJ and FTC focus on the potential loss of competition from transactions between firms with strong positions in adjacent areas or market. The antitrust agencies have shown increasing interest in the possible loss of innovation competition between merging firms where they are in neighboring or similar markets because of the potential for future innovation and competition in the spaces between each company's existing portfolio. The DOJ and FTC statement certainly reflects the agencies' attention to innovation competition in antitrust reviews and notes their consideration of possible harms to innovation, short-term and long-term.

    Defense industry firms should recognize that this interagency debate likely foreshadows greater scrutiny of defense industry transactions from both DOD and the antitrust agencies. The antitrust agencies' focus on more nebulous innovation and R&D markets will reassure DOD that the antitrust agencies can be relied on to protect DOD's policy concerns.