Gregory Hayes, Raytheon CEO: “Obviously, we have some concerns.”
WASHINGTON – Raytheon Technologies plans to formally oppose Lockheed Martin’s proposal to acquire rocket engine maker Aerojet Rocketdyne for $ 4.4 billion, Raytheon CEO Gregory Hayes said on February 17.
Aerojet Rocketdyne engines are used by Raytheon and Lockheed Martin in tactical and strategic missiles that companies manufacture for the United States Department of Defense.
“Obviously, we have some concerns” about Aerojet being acquired by a competitor, Hayes said at the Barclays Industrial Select Conference.
“They are a big supplier to us,” said Hayes of Aerojet. If Lockheed Martin is allowed to buy the company, “you don’t have an independent supplier on the side of the solid rocket engine. This gives us a break as we think about the competitive landscape going forward. “
Hayes said Raytheon will present its case to regulatory agencies, including the Federal Trade Commission and the Department of Defense. “We will see how all this is going to play out,” he said.
Since Lockheed Martin’s announcement on December 20 of its intention to acquire Aerojet, analysts have predicted a challenge from Raytheon based on the fact that the acquisition would give Lockheed a lot of power over military missile programs. The consolidation of Aerojet under Lockheed Martin, for example, would put Raytheon in the position of having to buy about 70 percent of its missile propulsion systems from its main competitor.
Lockheed Martin’s chief financial officer, Ken Possenriede, said the company would “play fair” as a supplier of engines to defense cousins. “Aerojet Rocketdyne will be a more reliable supplier as part of Lockheed Martin than it would be as an independent supplier,” he said at the Barclay conference a few hours after Hayes’ comments.
Lockheed Martin CEO Jim Taiclet said on December 21 that he expects the regulatory review of the acquisition to follow the model of Northrop Grumman’s acquisition of solid rocket engine supplier Orbital ATK. Regulators approved the deal in 2018 on condition that Northrop agreed to supply engines to its competitors.
Possenriede argued that vertical integration of Lockheed Martin’s missile manufacturing business with the propulsion supplier would improve the engineering process and reduce the fees that are charged to the government when products are purchased from subcontractors.
Raytheon is expected to defend regulators that the purchase of Orbital ATK by Northrop Grumman should be seen as a cautionary tale about what happens when competitors are removed from the market.
Orbital ATK was the dominant supplier of solid rocket engines and the acquisition of the company helped Northrop Grumman gain an overwhelming advantage in the competition for the Air Force’s next-generation intercontinental ballistic missile. Since that advantage was difficult to compete, Boeing was excluded from the missile program and Northrop won by default.
The FTC required Northrop to make Orbital ATK engines available to competitors on a non-discriminatory basis. But Boeing pointed out that such deals are difficult to enforce.
Raytheon also says that the Aerojet ownership would give Lockheed Martin a huge advantage in future DoD acquisitions of ballistic and hypersonic missiles.
Aerojet is the only American supplier of a key technology – the Divert and Attitude Control System – used in interceptor missiles purchased by the Missile Defense Agency to defend the United States against intercontinental ballistic missiles. Both Raytheon and Lockheed Martin use DACS on missiles they manufacture for the MDA.
In hypersonic missiles, whether they are glider vehicles or respirator missiles powered by ramjet engines, Aerojet would be the main supplier of propulsion.
Biden administration views still unknown
A big question is whether the Biden government will see the consolidation of the industry through different lenses than its predecessors.
Deputy Defense Secretary Kathleen Hicks would play a central role in reviewing industry mergers. During the confirmation hearing on February 2, she said that “some consolidation is probably inevitable” because the defense market can only support a certain number of suppliers. “But extreme consolidation creates challenges for innovation,” said Hicks. “This is our comparative advantage over authoritarian states like China and Russia … If we take away all the competition, obviously this is a challenge for both the taxpayer, but it is also a challenge in terms of innovation.”
In the past, the Pentagon has stated that the defense industry is made up of private companies and prefers not to interfere with market forces, except in cases of mergers between major contractors. Aerojet executives have made no secret that they want to be acquired by a major contractor like Lockheed Martin to strengthen their financial stability. If the FTC sued to oppose the deal, analysts said, Lockheed Martin might leave, but sooner or later someone would end up buying Aerojet.
Industry consultant Loren Thompson, who works with both Aerojet and Lockheed Martin, said Aerojet is a “fragile company that will not survive as an independent player in the market.” Aerojet would benefit from being part of a larger conglomerate because it is currently overly dependent on civilian and military space programs that “can be harmed by an election result,” he said.
Thompson said blocking this merger would raise questions about why the FTC allowed Northrop Grumman to acquire Orbital ATK and has now suddenly decided that this transaction raises “many competitive concerns”.