Defense Consolidation Continues as Spending Priorities Shift

Date : 06/11/2019 @ 10:59AM
Source : Dow Jones News
Stock : Lockheed Martin Corp. (LMT)
Quote : 356.96  0.75 (0.21%) @ 12:22AM

Defense Consolidation Continues as Spending Priorities Shift

Lockheed Martin (NYSE:LMT)
Historical Stock Chart

2 Months : From May 2019 to Jul 2019

Click Here for more Lockheed Martin Charts.
By Doug Cameron and Ben Kesling 

The biggest aerospace-and-defense merger ever caps two years of deal making in an industry that is reorganizing in anticipation of slower growth in Pentagon spending and new priorities such as space systems and hypersonic missiles.

United Technologies Inc. and Raytheon Co. would be the third-biggest aerospace-and-defense company by sales after Boeing Co. and Airbus SE. Those companies along with Lockheed Martin Corp., Northrop Grumman Corp., General Dynamics Corp. and the U.S. arm of BAE Systems PLC would dominate a defense industry in which some 50 companies vied for big contracts 30 years ago.

Cuts to U.S. military spending also contributed to an estimated 17,000 U.S. firms leaving the industry between 2001 and 2015, according to a study by the Center for Strategic and International Studies, a think tank.

The Pentagon has also streamlined military operations in ways that have left less room for multiple contractors. Lockheed Martin's F-35 jet fighter, for instance, is meant to replace multiple other types of aircraft. That has contributed to the U.S. aerospace industry shrinking to three plane makers versus a dozen just decades ago. Similarly, there are just two big shipbuilders, General Dynamics and Huntington Ingalls Industries. At most three companies submit bids for most big defense contracts.

Pierre Chao, a defense consultant at Renaissance Strategic Advisors, said policy makers shouldn't be surprised that the industry has consolidated as the number of new weapons systems has shrunk.

"We've let market forces create the 'bigs,' " he said.

But Pentagon and antitrust officials have also discouraged further mergers among the remaining companies that attract the bulk of military spending. Pentagon officials have expressed concern that bigger companies wield so much clout that investment decisions can be distorted.

The combination of United Technologies and Raytheon is likely in bounds because the companies make lines of products that don't overlap, analysts said.

"I feel this proposed merger is right at the line of what would be allowable," said.Andrew Hunter, a senior fellow at the Center for International and Strategic Studies.

President Trump said in an interview with CNBC on Monday that he was worried the merger would decrease competition in the defense industry. Analysts saw room in his remarks for United Technologies and Raytheon to make a case that their businesses don't overlap in a way that would give them too much control of the sector.

"He expressed concern 'if they have the same products.' " said Capital Alpha LLC analyst Byron Callan. "They don't."

Raytheon Technologies, as the new company would be called, would be a top supplier of systems such as engines and radars for the F-35 combat jet. Executives at United Technologies and Raytheon said in a call with investors on Monday that the merger would create cost savings that will lower prices for those systems and allow for investments in updated capabilities.

The executives said they have yet to brief the Defense Department on their plans for the merger. A department spokesman said Ellen Lord, the Pentagon's chief weapons buyer, would speak to defense executives about the implications of the merger.

Ms. Lord has encouraged companies to take on more risk and invest more money in developing new weapons systems. The Trump administration is also addressing concerns that the U.S. has become overreliant on foreign suppliers because so many domestic companies have exited defense.

The department hasn't challenged a big industry deal since Lockheed Martin bought the Sikorsky helicopter business from United Technologies in 2014. The deal prompted the Pentagon to consider adding national security concerns when reviewing proposed mergers and acquisitions on competition grounds.

Frank Kendall, the Pentagon's chief weapons buyer at the time and a former Raytheon executive, ultimately approved the deal because Lockheed Martin didn't produce rival helicopters.

But he warned that further consolidation could hurt innovation, constrict the supplier base and cost taxpayers more.

Northrop Grumman last year acquired Orbital ATK Inc., a maker of missile engines and space rockets. General Dynamics acquired CSRA Inc. to bulk up its information-technology offerings as the Pentagon migrates more systems to the cloud.

And Harris Corp. and L3 Technologies Inc. are this month expected to close a merger that will create the seventh-largest defense company.

Boeing has been a vocal opponent of recent industry consolidation, with CEO Dennis Muilenburg questioning both Honeywell's effort to merge with United Technologies and the latter's purchase of Rockwell Inc.

Boeing has been pressuring suppliers to cut costs, though creation of ever-larger competitors has reduced its negotiating clout. The new merger could add pressure to Boeing, analysts say.

"They've gone from suppliers," said Richard Aboulafia at Teal Group LLC, an industry consultant, "to a near-peer company in size and outlook."

Boeing said Monday it would "work" with UTC and Raytheon.

"I understand the realities of business and what's driving these consolidations," said Chuck Hagel, defense secretary from 2013 to 2015. But he added: "The concern I have, from a defense and security standpoint, is you're having to rely on fewer and fewer options and companies." The United Technologies-Raytheon merger provides economies of scale that could help drive down prices for consumers, he said, something that becomes important as weapons systems across the board become more complex and more expensive. And while it will likely be scrutinized, he said he doesn't see the merger being blocked.

Write to Doug Cameron at doug.cameron@wsj.com and Ben Kesling at benjamin.kesling@wsj.com

 

(END) Dow Jones Newswires

June 11, 2019 05:44 ET (09:44 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

Latest LMT Messages

{{bbMessage.M_Alias}} {{bbMessage.MSG_Date}} {{bbMessage.HowLongAgo}} {{bbMessage.MSG_ID}} {{bbMessage.MSG_Subject}}

Loading Messages....


No posts yet, be the first! No {{symbol}} Message Board. Create One! See More Posts on {{symbol}} Message Board See More Message Board Posts


Your Recent History
LSE
GKP
Gulf Keyst..
LSE
QPP
Quindell
FTSE
UKX
FTSE 100
LSE
IOF
Iofina
FX
GBPUSD
UK Sterlin..
Stocks you've viewed will appear in this box, letting you easily return to quotes you've seen previously.

Register now to create your own custom streaming stock watchlist.


NYSE, AMEX, and ASX quotes are delayed by at least 20 minutes.
All other quotes are delayed by at least 15 minutes unless otherwise stated.