We still might not know the Pentagon’s official stance on mergers and acquisitions, but as the months tick by, we’re getting a better sense of how top defense CEOs view the market.
Northrop Grumman CEO Kathy Warden became the latest to weigh on an M&A market during a discussion with the Brookings Institution’s Michael O’Hanlon earlier this week. While Warden noted that her opinion really doesn’t matter since it’s the government who approves or disapproves sales, she laid out her view of the defense aerospace and defense sector.
“What I see is a belief that in many areas, we are either at the right number of industrial base participants or even a little light,” she said. “So I don’t see a lot more consolidation, particularly not at the top tier, or even what I would call the middle tier of companies.
“There will always be some level of consolidation of smaller companies,” she continued. “That’s healthy. It helps those organizations to be well capitalized and being able to take their ideas and scale to the next level. And so I believe that will continue to happen. As long as that happens at a pace similar to new companies coming into the industry, that’s good in my view, and that’s what I see today. So we’re probably at a healthy place as we sit here today.”
Just a few weeks ago, Lockheed Martin CEO Jim Taiclet said the window for mergers and acquisitions within the defense sector “isn’t that open right now,” in part because of increased regulatory scrutiny by the Biden administration. Lockheed’s acquisition of Aerojet Rocketdyne, announced late last year, has been delayed until 2022 amid increased government scrutiny of the deal. It’s expected to close in the first quarter, executives said last month on a quarterly earnings call.
We still don’t know the Pentagon’s official M&A policy, since the Biden administration still hasn’t filled the office’s top two positions, let alone a number of important assistant secretaries further down the org chart.
No more fixed-price contracts, please. Warden also criticized the Pentagon’s occasional practice of buying weapons through fixed-price development contracts.
“The use of firm-fixed-price development contracts, I think, is very detrimental,” she said. “It shifts too much risk, too early in the lifecycle and it discourages leaning far forward and taking the risk that you may fail and need to reset and move forward in a different direction; plus the government loses control over those decisions because they all get shifted to the industrial partner.”
Car chipmakers? Ford and General Motors are taking steps that could lead to the automakers manufacturing computer chips, the Wall Street Journal reports. Ford announced Thursday that it signed a “strategic collaboration” with New York-based GlobalFoundries “to advance semiconductor manufacturing and technology development within the United States, aiming to boost chip supplies for Ford and the U.S. automotive industry.” The auto industry has been hit hard by the shortage in chips, which are increasingly important as cars become more autonomous and transition to battery-powered, electric propulsion. Defense and aerospace firms haven’t been immune to the chip shortages.
Russia’s new combat jet. The fifth-generation Su-75 “Checkmate” fighter made its international debut at the Dubai Air Show this week. The plane is being pitched as an alternative to the U.S.-made F-35, Breaking Defense reports.
General Atomics is secretly developing a new drone that can carry 16 Hellfire missiles, Breaking Defense reports.
Making Moves: The Mitre board has elected Mike Rogers, the former Michigan Republican congressman who chaired the House Permanent Select Committee on Intelligence, chairman of its board.
Programming note: We’re off next Friday for the Thanksgiving holiday, so look for the next Defense Business Brief on Dec. 3.
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