Defense Industry Could See Another Wave of Mergers, Acquisitions

The defense industry could I be on the cusp of further consolidation as contractors look to bolster their business portfolios and access to innovation through mergers and acquisitions, analysts say.

M&A has been a long-term trend since the end of the Cold War and the 1993 "Last Supper" when then-Deputy Defense Secretary William Perry encouraged consolidation among contractors to achieve efficiencies in an era of significantly reduced military expenditures.

"Merger activity in the defense industry increased dramatically" noted a study by the Center for Strategic and International Studies, with the number of major prime contractors dropping from 50 to just six between 1993 and 2000.

While military budgets ramped up again in the decade after the 9/11 attacks, spending constraints stemming from the Budget Control Act of 2011, as well as the drawdowns in Iraq and Afghanistan during the Obama administration, had a major impact on industry, according to the CSIS study published in 2019 titled, "Evaluating Consolidation and the Threat of Monopolies within Industrial Sectors."

"Across categories and vendor sizes, the analysis found that the number of vendors receiving prime contracts from the Department of Defense dropped in all by 17,000, or nearly 20 percent over the drawdown period," the study said. Sectors experiencing major reductions in contact obligations for products and services included ships, aircraft, land vehicles, space systems, and missiles and ordnance.

In 2015, then-Undersecretary of Defense for Acquisition, Technology and Logistics Frank Kendall voiced concerns about the state of affairs.

"The trend toward fewer and larger prime contractors has the potential to affect innovation, limit the supply base, pose entry barriers to small, medium and large businesses, and ultimately reduce competition - resulting in higher prices to be paid by the American taxpayer," he warned.

There have been a number of high profile mergers and acquisitions in recent years including the combinations of General Dynamics and CSRA, Northrop Grumman and Orbital ATK, L-3 Technologies and Harris Corp.,

Lockheed Martin and Sikorsky, and Raytheon and United Technologies Corp.

Analysts say another wave of consolidation could be on the horizon. Many observers expect a decline in defense spending as the nation grapples with the economic fallout from the COVID-19 pandemic and exploding federal budget deficits.

"We forecast a range of scenarios, with the...