FTC decision to block Lockheed-Aerojet merger could push rocket maker into private equity arms

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

For one, a major driver of Aerojet’s bid for acquisition was the FTC’s previous decision to allow a combination of its much larger rival, Orbital ATK, with Northrop Grumman.

On the other hand, the company that has complained most vigorously about the proposed Lockheed-Aerojet merger, Raytheon Technologies, is itself the product of the largest merger in the history of the defense industry.

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

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

Had it been disclosed a year earlier, the deal likely would have won approval from Trump-era regulators with only modest conditions.

But here we are: Lockheed Martin CEO James Taiclet will now have to decide whether his company should challenge the FTC’s action in court.

I bet he won’t, because the deal 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 willingness to participate in networked warfare.

Each of these opportunities has the potential to increase company revenue by more than 3% that Aerojet would have added.

Lockheed is therefore likely to move on.

But that leaves Aerojet in an exposed position, because by signaling a desire to be taken over, it has now “put itself on the line” as we like to say on Wall Street.

With $2 billion in annual revenue, some private equity players could buy Aerojet for the financial equivalent of small change.

Trying to survive as a standalone, independent provider of rocket and missile propulsion is probably not a viable long-term option, as Aerojet’s main rival is now shrouded in the juggernaut that is Northrop Grumman – a powerhouse aerospace company which has consistently taken market share from other top tier defense companies.

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

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

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

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

Byron Callan, arguably the most respected defense industry analyst, says Aerojet could be acquired by a foreign company or a defense services company like Leidos.

But given the way regulators have emphasized Aerojet’s importance to national security, a foreign purchase is extremely unlikely, and defense services companies abhor the large fixed costs (not to mention risks) associated with the military business. rocket engines.

So Aerojet’s next suitor will likely be someone outside of the defense industry – someone who looks and smells like private equity.

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

It might be necessary just to justify the kind of Aerojet multiples that Aerojet is apparently looking for.

Lockheed might agree to a high multiple because of the functional synergies from the combined business, but financial buyers have to justify the price with outsized returns, which means cutting unnecessary expense.

It’s not hard to see where this leads: new owners would be less inclined to aggressively fund the kind of innovation that has characterized Aerojet’s culture since its inception.

It wouldn’t be a good outcome for national security, but it’s more likely following the FTC’s decision to block the merger with Lockheed.

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

Many industries are under scrutiny from regulators, from meatpackers to energy to technology.

Aerojet will provide a useful case study of whether this new antitrust approach is delivering productive results or simply accelerating a centuries-old decline in innovation that has already dragged US manufacturing to a low point.

To reiterate what I said above, Aerojet, Lockheed, Northrop, Orbital, and Raytheon have all repeatedly contributed to my think tank and/or consulted with customers.

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