23 March 1998
TEXT: COHEN ADVISES RENO THAT DOD OPPOSES MAJOR INDUSTRY MERGER
(Says "No" to Northrop Grumman/Lockheed Martin merger) (1320) Washington -- Defense Secretary Cohen March 23 advised the Department of Justice that the Department of Defense opposes the proposed acquisition of the Northrop Grumman Corp. by the Lockheed Martin Corp. as not being in the best interests of the Department of Defense or of the public. In a written release accompanying the text of a letter from Cohen to Attorney General Janet Reno, the Pentagon said DoD "reached its decision after a comprehensive review of the transaction and its effect on the DoD." Following is the Pentagon text: (begin text) March 23, 1998 DEPARTMENT OF DEFENSE COMPLETES REVIEW AND SAYS IT OPPOSES PROPOSED MERGER OF LOCKHEED MARTIN-NORTHROP GRUMMAN Secretary of Defense William S. Cohen today advised the Department of Justice that the Department of Defense opposes the proposed acquisition of the Northrop Grumman Corp. by the Lockheed Martin Corp. as not being in the best interests of the Department or the public. The Department reached its decision after a comprehensive review of the transaction and its effect on the DoD. The Department examined ongoing and anticipated programs as well as markets where the two companies compete. In a letter to Attorney General Janet Reno, Secretary Cohen stated: "The proposed transaction increases market concentration and adversely affects competition in a number of critical areas of defense electronics. These areas include electronic warfare, airborne early warning radar, and naval and undersea warfare. . . . In addition, the proposed transaction creates unprecedented problems of vertical integration throughout the electronics area." Secretary Cohen also said that: "Because of the extensive nature of these problems--both horizontal and vertical--we have also concluded that partial solutions addressing individual competitive issues will not be adequate." The Secretary's letter also said that the Department found that: "This transaction was the most complicated and difficult that we have reviewed to date. No previous merger has raised so many interrelated problems across so many markets. These problems are an outgrowth of the significant consolidation in the defense industry that has taken place in recent years." The Department also found that Northrop Grumman has a profitable aircraft business. Regarding this, Secretary Cohen stated: "The proposed transaction reduces the prospect for innovation and the likelihood of alternative teaming arrangements in aircraft programs." Secretary Cohen also observed that additional consolidation in the defense industry may be beneficial, and the Department of Defense will continue to support such consolidation when such transactions do not adversely affect competition. During the review, DoD staff worked closely with the staff of Justice Department's Antitrust Division. In his letter, Secretary Cohen praised the continuing cooperation of the two agencies in serving the public interest. A copy of Secretary Cohen's letter follows: THE SECRETARY OF DEFENSE WASHINGTON, DC 20301-1000 March 23, 1998 Honorable Janet Reno Attorney General Washington, DC 20530 Dear Madam Attorney General: The Department of Defense has reviewed thoroughly the proposed acquisition of the Northrop Grumman Corporation by the Lockheed Martin Corporation, two of the four largest defense firms in the United States today. This transaction was the most complicated and difficult that we have reviewed to date. No previous merger has raised so many interrelated problems across so many markets. These problems are an outgrowth of the significant consolidation in the defense industry that has taken place in recent years. We have concluded, for reasons stated below, that this merger creates significant competitive problems for the Department of Defense. Because of the extensive nature of these problems -- both horizontal and vertical -- we have also concluded that partial solutions addressing individual competitive issues will not be adequate. Accordingly, we believe that this transaction is not in the best interests of this Department. We have examined carefully the electronics businesses in which these companies compete and have found that the proposed transaction increases market concentration and adversely affects competition in a number of critical areas of defense electronics. These areas include electronic warfare, airborne early warning radar, and naval and undersea warfare. In addition, the proposed transaction creates unprecedented problems of vertical integration throughout the electronics area. For several years, the Department of Defense has been concerned that increased industry consolidation could have an adverse competitive effect by increasing vertical integration in the defense industry. Increased vertical integration provides incentives for firms either to favor their own in-house systems, even when better or cheaper products are available from competitors, or to withhold critical technologies from platform and system competitors. The potential for competitive problems increases if, as in this case, there are only two viable suppliers for important product areas, and one or both of these suppliers is a vertically integrated firm. Last year, the Defense Science Board reviewed the issues raised by increased vertical integration and confirmed the Department's concerns about its potentially harmful effects on competition for defense products. In our judgment, the proposed transaction leads to an unacceptable level of vertical integration that cannot be addressed adequately through behavioral remedies in a consent decree. Combining Lockheed Martin's existing platform and electronics strength with Northrop Grumman's considerable platform and electronics systems capabilities would enhance the new company's ability to make both platforms and key electronic subsystems, and could thereby affect adversely competition at both the platform and subtier level. Although it might be possible theoretically to address vertical integration concerns by providing key systems to prime contractors as government furnished property, or by requiring prime contractors to conduct full and open competitions for key systems subject to the Department's review of the selection, the Department determined that, in this case, where vertical concerns are so pervasive, these approaches clearly would provide an unsatisfactory solution. They would require greater and more intrusive Department of Defense management and regulation of decisions that are properly made by private contractors and would, therefore, be contrary to the thrust of our acquisition reform initiatives. Further, Northrop Grumman has a profitable aircraft business. It is a leader in stealth technology and has very capable and innovative design teams. In addition, Northrop Grumman is an important subcontractor to other aircraft manufacturers. We believe that the proposed transaction reduces the prospect for innovation and the likelihood of alternative competitive teaming arrangements in aircraft programs. We also believe that the Department will benefit from Northrop Grumman's availability to compete for aircraft programs. Finally, the proposed transaction creates significant conflicts of interest in the context of systems engineering and technical assistance contracts. Northrop Grumman's Logicon division assists the Department of Defense in managing some Lockheed Martin programs, including the Aegis weapon system, and in evaluating Lockheed Martin's performance. Lockheed Martin asserts that this acquisition would generate significant savings for the Department of Defense. We have considered these savings and have taken them into account in our evaluation of the transaction. In conclusion, I believe it is important to note that our analysis of this transaction applied the same standards we have used in our reviews of previous mergers and acquisitions in the defense industry. This transaction presented the Department with an unprecedented combination of horizontal and vertical problems. After a very thorough and careful review, we have concluded that the Department's interests would be best served if Lockheed Martin and Northrop Grumman do not merge. We also believe that additional consolidation within the defense industry may be beneficial to reduce excess capacity and lower costs, and we will support such transactions when they do not adversely affect competition. We will continue to analyze these transactions carefully to ensure that they meet these objectives. Once again, I note with pleasure the outstanding cooperation that has taken place between the Department of Justice and the Department of Defense during our reviews of this transaction. From our point of view, the public interest continues to be well-served by this process. Sincerely, William S. (Bill) Cohen (end text)
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