Antitrust regulators sue to block Lockheed’s Aerojet acquisition

·4 min read

WASHINGTON ― The U.S. Federal Trade Commission announced Tuesday it is suing to block Lockheed Martin’s planned acquisition of Aerojet Rocketdyne over antitrust concerns.

The government’s move is a major obstacle to Lockheed’s $4.4 billion bid to absorb a key supplier of solid-rocket motors and strengthen its position as a supplier in space and hypersonic technology. Lockheed CEO Jim Taiclet said Tuesday the company must decide whether to fight the lawsuit or abandon the deal.

In a statement Tuesday, FTC Bureau of Competition Director Holly Vedova argued the deal would allow Lockheed, the country’s largest defense contractor, to eliminate “our nation’s last independent supplier of key missile inputs.” That, in turn, would harm competition for some weapons systems the Defense Department relies on.

“Lockheed is one of a few missile middlemen the U.S. military relies on to supply vital weapons that keep our country safe. 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,” Vedova added.

“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 said it will file a complaint in the U.S. District Court for the District of Columbia seeking a preliminary injunction to stop the deal pending an administrative trial. The administrative trial is scheduled to begin June 16.

The FTC is arguing the acquisition would likely increase prices for missile systems, missile-defense kill vehicles and hypersonic cruise missiles, and that “innovation would be lessened, and quality would be reduced, hindering national security and defense interests.” Those weapons, “depend on critical propulsion technologies of the type supplied by Aerojet,” the FTC said in its statement.

It also argues that Aerojet, as an independent supplier, would invest in research and development more broadly than it would as part of a combined company.

Hours ahead of the announcement, Lockheed and Aerojet acknowledged they expected a lawsuit because the government’s concerns could not be addressed by a consent order.

On Lockheed’s earnings call Tuesday morning, Taiclet said the company has 30 days to decide whether to terminate the deal, per its agreement with Aerojet. He said company leaders will be working with Lockheed’s board to make a decision.

Taiclet offered assurances the company’s hypersonic weapons development strategy remains on firm footing.

“We think we could have gotten a speed and efficiency increase by the partial vertical integration on hypersonics through the [Aerojet] acquisition specifically, but we can still manage it whichever way that deal turns out,” he said.

In its own statement Tuesday, Aerojet Rocketdyne said the company “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.”

After Taiclet announced the transaction in December 2020, Waltham, Mass.-based Raytheon Technologies came out publicly against the deal, raising concerns it would force the company to negotiate with a competitor for solid rocket motors.

The deal faced a mixed reaction on Capitol Hill, where Sen. Elizabeth Warren, D-Mass., had urged regulators to scrutinize the transaction. However, proponents argued the proposed merger would restore competitive balance, following Northrop Grumman’s 2018 acquisition of another major rocket propulsion firm, Orbital ATK.

Byron Callan, a policy research expert at Capital Alpha Partners, projected in a email to investors Tuesday that Lockheed will not be willing to battle the government in court and its deal with Aerojet will not go through.

But Callan said the Lockheed-Aerojet deal isn’t emblematic of other potential mergers and acquisition activity and argued the roadblock isn’t indicative of a larger trend.

Unlike the market areas for defense services and for emerging technologies for space and cloud-driven command and control systems, the missile and propulsion segment is highly concentrated, he wrote.

”The FTC during the Biden administration has taken a different view on market concentration and vertical integration than the last one, which approved the Northrop Grumman-Orbital ATK deal,” Callan said. “We don’t, however, see the current FTC move as one that throws defense [M&A] into the deep freeze.”

Loren Thompson, an industry consultant whose clients include Lockheed, said he expects the defense giant to walk away from the merger, leaving Aerojet likely to be acquired by a private-equity firm. Thompson, whose Lexington Institute think tank receives funds from Aerojet and Raytheon, said the Biden administration’s antitrust arm has been so aggressive that he does see a chilling effect on M&A.

“Anybody who specializes in the M&A business has to be wondering if there’s a deal the FTC would approve without strings,” Thompson said.

Stephen Losey contributed to this report.