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From Antitrust Law Daily, April 12, 2016

Antitrust agencies remind defense industry of their commitment to preserving competition

By Jeffrey May, J.D.

When reviewing proposed transactions within the defense industry, the overriding goal of the Department of Justice Antitrust Division and the FTC in enforcing the antitrust laws is to maintain competition going forward for the products and services purchased by the Department of Defense, according to a joint statement released by the agencies today. The antitrust agencies noted that, in reviewing proposed mergers, they work with the Defense Department, which is in the best position to assess the impact of potential defense industry consolidation on that department’s ability to fulfill its mission in ensuring national security.

“The Agencies rely on [the Defense Department]’s expertise, often as the only purchaser, to evaluate the potential competitive impact of mergers, teaming agreements, and other joint business arrangements between firms in the defense industry,” the statement reads.

The statement was released in light of “recent speculation about possible future consolidation,” said Bill Baer, Assistant Attorney General in charge of the Antitrust Division. Baer said that it was important to reinforce the message that the Justice Department is “committed to preserving competition for current and future defense procurement.”

Horizontal Merger Guidelines. The agencies’ joint 2010 Horizontal Merger Guidelines provide the analytical framework for reviewing mergers and acquisitions in the defense industry, as with transactions in other industries, according to the statement. “In light of our substantial experience applying the Guidelines to defense industry mergers and acquisitions, the Agencies are able to focus on issues that are central to, and often dispositive in, assessing the competitive effects of such mergers,” the agencies noted.

The antitrust agencies recognize that many sectors of the defense industry are highly concentrated or moving toward high concentration. “In those markets, the Clayton Act’s incipiency standard is a particularly important aspect of the Agencies’ analysis,” the statement points out. The Horizontal Merger Guidelines state that, under the incipiency standard, the agencies may challenge mergers that “pose a real danger of harm through coordinated effects, even without specific evidence showing precisely how the coordination likely would take place.”

Procompetitive aspects of a proposed transaction. In response to the government’s antitrust concerns, parties to a merger may offer evidence of procompetitive aspects of the proposed transaction to defend their deal. These efficiencies might include economies of scale, decreased production costs, and enhanced research and development capabilities.

“However, if a transaction threatens to harm innovation, reduce the number of competitive options needed by [the Defense Department], or otherwise lessen competition, and therefore has the potential to adversely affect our national security, the Agencies will not hesitate to take appropriate enforcement action, including a suit to block the transaction,” it was noted.

Defense industry consolidation. In recent years, mergers in the defense industry have avoided antitrust challenges from either the Antitrust Division or the FTC. Last November, Lockheed Martin completed its acquisition of United Technologies Corp.’s Sikorsky Aircraft business unit, without a federal antitrust challenge. The EC also cleared the acquisition, saying that the deal would not raise competition concerns because there were no overlaps between the companies’ activities.

But even deals that likely raised competition concerns have received a pass. In 2013, the FTC closed an investigation into the proposed acquisition of rocket engine manufacturer Pratt & Whitney Rocketdyne by aerospace company GenCorp Inc. The Commission said at the time that it did not seek to challenge the transaction, primarily because the Defense Department wanted the acquisition to go forward for national security reasons. However, the FTC voiced concern that the deal would give GenCorp a monopoly in the market for a type of advanced missile defense interceptor propulsion system.

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