The Federal Trade Commission on Tuesday sued to block Lockheed Martin’s $4.4 billion acquisition of engine-maker Aerojet Rocketdyne, saying the move would allow Lockheed to "jack up the price the U.S. government has to pay."
The move is the Biden administration's first decision involving a large defense acquisition and will be closely watched by other companies as they weigh future corporate mergers against potential blowback by the FTC.
The FTC announcement noted this was the group's "first outright challenge to a defense merger in decades."
“If consummated, this deal would give Lockheed the ability to cut off other defense contractors from the critical components they need to build competing missiles," FTC Bureau of Competition Director Holly Vedova said in a statement Tuesday. "Without competitive pressure, Lockheed can jack up the price the U.S. government has to pay, while delivering lower quality and less innovation. We cannot afford to allow further concentration in markets critical to our national security and defense.”
The FTC simultaneously filed for a preliminary injunction in Washington D.C. federal court and filed suit in the agency’s in-house court. Copies of the court documents weren’t immediately available. The FTC’s administrative proceedings are traditionally stayed until after the federal court rules on the injunction request.
Earlier on Tuesday, Aerojet said in a statement that the commission’s “concerns regarding the transaction cannot be addressed adequately by the terms of the proposed consent order.”
Lockheed said in an SEC filing that it will review the lawsuit and evaluate its options. "We may elect to defend the lawsuit or terminate the merger agreement."
“In general, it is our practice not to comment on pending litigation. As we said on our earnings call, we are reviewing the FTC’s complaint and will respond in due course,” a Lockheed Martin spokesperson said in a statement.
Aerojet said it "continues to believe in the benefits of the transaction for the United States and its allies, the industry, and all of the company’s stakeholders.”
Temperature check: The FTC’s decision serves as a barometer for similar agreements under the Biden administration, said Byron Callan, managing director at Capital Alpha Partners. Other companies will view the deal as a signal for what they can and cannot do while Biden is in the White House.
"I still don't think it will have a chilling effect on the overall [mergers and acquisitions] sector,” Callan said. “But it will maybe suggest some guardrails around what the largest contractors can do, and how interested DoD is in preserving competition in some of these different sectors.”
Pros and cons: Lockheed Martin is the world’s largest defense contractor and manufactures everything from hypersonic weapons to ships to fighter jets. Aerojet Rocketdyne is a top propulsion provider and has been involved in every U.S. space and missile project since the beginning of the space age.
Lockheed argued that acquiring Aerojet would mean lower prices for the U.S. government. In addition, according to a company fact sheet, the deal would accelerate future missile programs and ensure a long-term supply of propulsion products for the military.
Critics of the deal argued that Lockheed Martin’s promise of ensuring Aerojet will remain fair in future negotiations with other defense vendors is not good enough and they should remain separate companies.
The acquisition would have reshaped competition for liquid and solid rocket propulsion used for hypersonic engines, electric power and propulsion for space products. Besides Aerojet, Orbital ATK, acquired by Northrop Grumman in 2018, is the only other solid-rocket motor supplier in the U.S.
Raytheon Technologies, which opposed the Aerojet acquisition, told the FTC the merger would hurt its propulsion systems business because Aerojet supplies 70 percent of its components and 100 percent of what is needed for its anti-ballistic missile systems. Raytheon was concerned the acquisition could allow Lockheed to increase the price of the components in future deals.
Aerojet's customers include Lockheed Martin, Raytheon Technologies and United Launch Alliance.
Hill influence: Raytheon wasn’t alone in opposing the deal. Democratic Sen. Elizabeth Warren, whose home state of Massachusetts is the headquarters for Raytheon, expressed concern the acquisition would stifle competition.
The senator pointed to the Northrop Grumman-Orbital ATK deal. At the time of the acquisition, the company said Orbital’s solid-rocket motors would be made available to all vendors in future competitions.
But since the acquisition went through, the FTC has launched an investigation into Northrop’s handling of subsequent competitions.
“I support the FTC taking aggressive action to oppose further corporate concentration in the defense industry that could threaten U.S. national security," Warren said in a statement Tuesday. "The FTC’s lawsuit to block Lockheed Martin’s proposed acquisition, which has unanimous, bipartisan support from the Commissioners, is critical."
Connor O'Brien contributed to this report.
CORRECTION: An earlier version of this report misquoted an SEC filing from Lockheed Martin. The company said it "may elect" to either fight the lawsuit or end the merger agreement.