Gregory Hayes, CEO of Raytheon: “We are naturally concerned.”
WASHINGTON – Raytheon Technologies plans to formally oppose Lockheed Martin’s proposed $ 4.4 billion acquisition of Aerojet Rocketdyne rocket maker, Raytheon CEO Gregory Hayes said on February 17.
Aerojet Rocketdyne’s engines are used by both Raytheon and Lockheed Martin in tactical and strategic missiles that the companies make for the U.S. Department of Defense.
“We are obviously concerned about the purchase of Aerojet by a competitor,” Hayes said at the Barclays Industrial Select conference.
“They are a great supplier to us,” Hayes said of Aerojet. If Lockheed Martin is allowed to buy the company, ‘you do not have an independent supplier on the fixed rocket engine side. It gives us silence as we reflect on the competitive landscape ahead. ”
Hayes said Raytheon would direct his case to regulatory agencies, including the Federal Trade Commission and the Department of Defense. “We’ll see how this whole thing plays out,” he said.
Since Lockheed Martin’s announcement on December 20 about his intention to acquire Aerojet, analysts have expected a challenge from Raytheon on the grounds that Lockheed would give too much power over military missile programs. The consolidation of Aerojet under Lockheed Martin would put Raytheon in the position of having to buy about 70 percent of the propulsion systems of its missiles from its primary competitor.
Lockheed Martin chief financial officer Ken Possenriede said the company would ‘play fair’ as an engine supplier for defense primaries. “Aerojet Rocketdyne is going to be a more reliable supplier as part of Lockheed Martin as an independent supplier,” he said at the Barclay conference hours after Hayes’ remarks.
Lockheed Martin CEO Jim Taiclet said on December 21 that he expects the acquisition to follow the model of Northrop Grumman’s acquisition of Orbital ATK, the supplier of fixed rocket motors. Regulators approved the deal in 2018 on condition that Northrop agreed to supply cars to its competitors.
Possenriede argued that the vertical integration of Lockheed Martin’s rocket manufacturing business with the propulsion supplier would improve the engineering process and reduce the fees charged by the government when purchasing products from subcontractors.
Raytheon is expected to tell regulators that the acquisition of Northrop Grumman from Orbital ATK should be seen as a warning about what happens if competitors are removed from the market.
Orbital ATK was the dominant supplier of solid rocket motors and the acquisition of the company helped Northrop Grumman gain an overwhelming advantage in the competition for the next generation intercontinental ballistic missile from the air force. Because the advantage was difficult to compete, Boeing bent the missile program and Northrop won by default.
The FTC required Northrop to make Orbital ATK cars available to competitors on a non-discriminatory basis, but Boeing pointed out that it is difficult to enforce such agreements.
Raytheon also claims that ownership of Aerojet Lockheed Martin will provide a major advantage in future DoD acquisitions of ballistic and hypersonic missiles.
Aerojet is the only US provider of key technology – the diversion and attitude control system – used in interceptor missiles acquired by the Missile Defense Agency to protect the United States from incoming intercontinental ballistic missiles. Both Raytheon and Lockheed Martin use DACS in missiles they make for the MDA.
On hypersonic missiles, whether they are gliders or air-breathing missiles powered by ramjet engines, Aerojet would be the primary propulsion provider.
The opinion of Biden administration is still unknown
A big unknown is whether Biden’s government will consider consolidating the industry with a different lens than its predecessors.
Deputy Secretary of Defense Kathleen Hicks would play a key role in reviewing mergers in the industry. During her confirmation hearing on February 2, she said some degree of consolidation is likely to be inevitable, as the defense market can only sustain a certain number of suppliers. “But extreme consolidation does create challenges for innovation,” Hicks said. “It’s our comparative advantage over authoritarian states like China and Russia … If we eliminate all competition, it’s obviously a challenge for the taxpayer, but it’s also a challenge in terms of innovation.”
In the past, the Pentagon has maintained that the defense industry is made up of private companies and prefers not to interfere with market forces, except in cases of mergers between top primary contractors. Aerojet drivers have made no secret of the fact that they want to be acquired by a major contractor such as Lockheed Martin to boost its financial stability. If the FTC sues to oppose the deal, analysts say, Lockheed Martin could walk away, but sooner or later someone will buy Aerojet.
Operations consultant Loren Thompson, who works with Aerojet and Lockheed Martin, said Aerojet is a “fragile business that will not survive as a stand-alone player in the market.” Aerojet will benefit from being part of a larger conglomerate, as it is currently too dependent on military and civilian space programs that can be ‘derailed by an election result’, he said.
Thompson says blocking this merger will raise questions about why the FTC is allowing Northrop Grumman Orbital to acquire ATK, and now suddenly decides that this transaction raises ‘too much competitive concern’.