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FTC Move To Block Lockheed-Aerojet Merger Could Push Rocket Maker Into The Arms Of Private Equity

By News Creatives Authors , in Business , at January 26, 2022

The Federal Trade Commission’s decision to oppose a merger of Lockheed Martin with rocket-maker Aerojet Rocketdyne is full of ironies.

On the one hand, a key driver of Aerojet’s willingness to be acquired was the FTC’s previous decision to permit a combination of its much bigger rival, Orbital ATK, with Northrop Grumman.

On the other hand, the company that complained most strenuously about the proposed Lockheed-Aerojet tie-up, Raytheon Technologies, is itself the product of the biggest merger in defense industry history.

The FTC approved that deal with minimal conditions, so people inside Lockheed Martin might be excused for thinking a double standard is at work within the agency.

The reality is that the FTC has changed its standards for assessing mergers, and the Lockheed-Aerojet deal is simply the victim of unfortunate timing.

If it had been disclosed a year earlier, the deal probably would have won approval from Trump-era regulators with only modest conditions attached.

But we are where we are: Lockheed Martin CEO James Taiclet will now need to decide whether his company should contest the FTC action in court.

I’m betting he won’t, because the transaction has already taken over a year of management’s time, and Lockheed has bigger fish to fry—like its emerging dominance in hypersonics, its pursuit of next-generation air dominance, its expanding space business, and its push to participate in networked warfare.

Any one of these opportunities holds the potential to increase corporate revenues by more than the 3% that Aerojet would have added.

So Lockheed is likely to move on.

But that leaves Aerojet in an exposed position, because by signaling a willingness to be acquired, it has now “put itself in play” as they like to say on Wall Street.

With $2 billion in annual revenues, some private equity players could pick up Aerojet for the financial equivalent of pocket change.

Trying to survive as a stand-alone, independent provider of rocket and missile propulsion probably isn’t a viable option over the long run, because Aerojet’s main rival is now wrapped into the juggernaut that is Northrop Grumman—an aerospace powerhouse that has steadily taken market share from other first-tier defense firms.

Having had business relations of one sort or another with all of the key players here over the years, I have a fair idea of where Aerojet and its main products stand.

The bottom line is that its core franchises, while steady cash generators, aren’t big enough to compete over the long term with the likes of Northrop in the propulsion business.

In fact, the only reason it remains in the large solid rocket motor business is because Northrop has graciously allowed it to build one of the stages for the Air Force’s next-generation ICBM.

We’ll see how long that lasts, now that the FTC has effectively eliminated other first-tier defense contractors as potential suitors for the Aerojet business.

Byron Callan, arguably the most respected industry analyst in the defense space, says that Aerojet might be acquired by a foreign company or a defense services enterprise like Leidos.

But given how regulators have highlighted the importance of Aerojet to national security, a foreign purchase is exceedingly unlikely, and defense services companies abhor the large fixed costs (not to mention the risks) associated with being in the rocket-engine business.

So Aerojet’s next suitor is likely to be somebody outside the defense sector—somebody that looks and smells like private equity.

If Aerojet were to be acquired by a financial buyer, its first impulse probably would be to generate more cash from operations.

That might be necessary just to justify the kind of multiple Aerojet is apparently seeking.

Lockheed could accept a high multiple because of functional synergies arising from the combined enterprise, but financial buyers have to justify the price with outsized returns, and that means slashing unnecessary expenditures.

It isn’t hard to see where that leads: the new owners would be less likely to aggressively fund the kind of innovation that has been a hallmark of Aerojet culture since its inception.

That wouldn’t be a good outcome for national security, but it is more likely in the aftermath of the FTC’s decision to block the merger with Lockheed.

The agency’s action had less to do with Lockheed and Raytheon than it did with a change in antitrust philosophy under the Biden administration.

Lots of industries are being subjected to elevated scrutiny by regulators, from meatpackers to energy to tech.

Aerojet will provide a useful case study of whether this new approach to antitrust yields productive results, or simply accelerates a secular decline in innovation that has already reduced America’s manufacturing sector to a low ebb.

To reiterate what I said above, Aerojet, Lockheed, Northrop, Orbital and Raytheon have all at various times contributed to my think tank and/or been consulting clients.

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