Lawmakers urge Defense Department to play larger role in scrutinizing mergers

(Tribune News Service) — Two Democratic lawmakers are pushing the Pentagon to take a more in-depth approach to reviewing potential defense business mergers as the number of military contractors dwindles.

Demanding “robust oversight” from the Defense Department when it comes to those deals, Sen. Elizabeth Warren of Massachusetts and Rep. John Garamendi of California, both members of their chambers’ respective Armed Services committees, lamented what they called officials’ “insufficient review” of defense industrial base consolidation.

“With rampant consolidation that affects supply chains, prices, and security, DoD must conduct more thorough and transparent assessments of [mergers and acquisitions] in the defense space,” they wrote in a Friday letter to Defense Secretary Lloyd J. Austin III.

Though concerns over U.S. industrial base consolidation are far from new, defense contractor L3Harris Technologies’ recent high-profile purchase of one of the two domestic producers of solid rocket motors (Aerojet Rocketdyne) has shone a spotlight on the Pentagon’s role in assessing and overseeing mergers and acquisitions.

An October 2023 report from the Government Accountability Office found that the department has “limited” insight into defense business mergers and acquisitions, with officials in recent years assessing, on average, 40 cases out of the approximately 400 that occurred annually.

Meanwhile, the report’s findings showed the Defense Department doesn’t typically monitor the effects of any completed consolidations on the defense industrial base, nor are officials required to. Instead, the Pentagon steps in only if the antitrust agencies seek the department’s involvement — something the GAO reported has occurred in two instances over the last decade.

“Without transparency the public cannot know DoD’s assessment of whether a merger might affect defense contracts, prices, supply chain gaps, innovation, and national security,” Warren and Garamendi wrote. “This makes it more difficult to oversee and mitigate the risks of mergers, or to assess the sufficiency of DoD’s review process.”

Merger in focus

In the lead-up to the July 28 closure of L3Harris’ $4.7 billion deal to buy Aerojet Rocketdyne, Warren — a proponent of heavily scrutinizing proposed mergers — urged the Federal Trade Commission to block the purchase.

Now, with the deal sealed, she and Garamendi used their letter to underscore the “gaps” in the Defense Department’s review of the transaction — and question to what extent they may represent “systemic lapses” that would necessitate an overhaul of the Pentagon’s approach.

While L3Harris leadership told investors during a second-quarter 2023 earnings call that the company gave the department “assurances … that we would be a merchant supplier of rocket motors and rocket engines,” Warren and Garamendi noted that it’s still unclear what those assurances were.

Citing a briefing between both lawmakers’ staff and the Defense Department in November 2023, the letter stated that Pentagon officials relayed they hadn’t imposed conditions on the merger or indicated they would monitor its impacts. The officials also “could not provide a clear roadmap of engagement” with the FTC and Department of Justice on the matter, the letter said.

Those answers, taken with the report from GAO, may require the department “to completely reassess its approach [to] major defense industry mergers moving forward,” lawmakers wrote.

“These concerns are not unique to the L3Harris-Aerojet merger,” the letter said. “The assessments DoD conducts on M&A lack basic public transparency which might otherwise provide useful insight and accountability.”

The two asked Austin to disclose by March 11 the assurances that L3Harris gave the Pentagon regarding the merger and how officials will hold the company to them. If no such assurances were given, they want to know why the department didn’t seek any.

And they want the Pentagon to outline the transaction’s benefits to the defense industrial base, as well as how the department will ensure they materialize.

“Given the importance of ensuring a robust defense industrial base and diversified supply chains, it is concerning that the DoD does not appear to be conducting robust oversight of even some of the largest mergers,” Warren and Garamendi said.

A Pentagon spokesman declined to comment on the letter, writing in an email that the secretary will reply “in due course,” as he does “with all of his correspondence.”

New guidance pending

For its part, the Defense Department has expressed an interest in bolstering its review efforts. The department concurred with all four recommendations the GAO made in its October report, and Pentagon acquisition chief William LaPlante indicated in the response that officials intend to issue new guidance on assessing mergers and acquisitions.

In addition, LaPlante said the department plans to request funding for reviewing potential consolidations within the forthcoming five-year spending plan. The assistant secretary for industrial base policy currently oversees defense mergers without any dedicated funding, LaPlante wrote — but he said additional monies will allow officials to increase their workforce and resources.

The Defense Department also pledged to look at designing and implementing a monitoring initiative to track whether risks identified in its merger assessments were realized after the transaction is completed. And LaPlante wrote that the forthcoming guidance will include directives on evaluating those risks after deals have closed.

A legislative tweak

In the fiscal 2024 National Defense Authorization Act, Congress sought to boost the Pentagon’s role in reviewing potential mergers and acquisitions — but Warren and Garamendi hinted in their letter that further action is likely needed.

A provision in the law would enable the Defense Department to get information on a proposed defense-related merger or acquisition at the same time as the Federal Trade Commission and Department of Justice.

That simultaneous notification, Warren and Garamendi wrote, allows defense officials to “proactively assess potential threats to the industrial base rather than being forced to rely on federal antitrust agencies to do so.”

In the letter, the two asked how officials plan to ensure they receive the required disclosures, and what actions will be taken to assess the impacts of mergers. But they also suggested they intend to press the Pentagon to be more forthcoming.

“Recent history suggests that much more needs to be done to ensure we maintain a robust, competitive defense base,” Warren and Garamendi said. “Without more transparency, however, Congress cannot assess whether DoD’s current authorities and access are sufficient to protect our national security.”

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