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John Engle
John Engle
Articles (613) 

Lockheed Martin's Aerojet Rocketdyne Acquisition Threatened by Raytheon Complaint

The $4.4 billion deal will need to win the approval of both the Pentagon and FTC

February 18, 2021 | About:

In December, aerospace and defense giant Lockheed Martin Corp. (NYSE:LMT) announced plans to acquire rocket engine manufacturer Aerojet Rocketdyne Holdings Inc. (NYSE:AJRD). As I discussed at the time, the $4.4 billion transaction seemed like a good deal for both companies, allowing Lockheed to consolidate a key part of its supply chain while giving a lifeline to a company that has increasingly struggled to compete with its bigger industry peers.

But not everyone is convinced. On Feb. 17, one of Lockheed's major competitors, Raytheon Technologies Corp. (NYSE:RTX), offered a vocal challenge to the planned acquisition, adding another element of risk to a deal that is still dependent on approval from the federal government.

Raytheon expresses dismay

Speaking at the Barclays Industrial Select virtual conference on Feb. 17, Raytheon CEO Greg Hayes expressed his company's concerns about the proposed acquisition:

"They [Aerojet] are a huge supplier to us, and if that merger actually happens, you don't have an independent supplier on the solid-rocket-motor side. And also, I think it gives us pause as we think about the competitive landscape going forward."

As one of Aerojet's top customers, Raytheon is understandably concerned about the prospect of the rocket engine manufacturer falling into the hands of one of its biggest rivals. While such an argument about the risks to industry competition is reasonable and worthy of consideration, it will likely struggle to convince. After all, the 2017 acquisition of Orbital ATK, another solid rocket motor company, by Northrop Grumman Corp. (NYSE:NOC) went unchallenged.

The Pentagon aims for balance

While Raytheon's challenge may look like a long shot, it comes during a time of transition for the federal government, which will ultimately have the final say on whether the acquisition goes through. Kathleen Hicks, the Biden administration's newly minted Deputy Defense Secretary, is set to be a pivotal decision-maker with regard to the Lockheed-Aerojet merger. During her Feb. 2 Senate confirmation hearing, Hicks walked a fine line on the subject of industry consolidation:

"Some consolidation is probably inevitable. But extreme consolidation does create challenges for innovation. That's our comparative advantage over authoritarian states like China and Russia...If we move all competition out, obviously that's a challenge both for the taxpayer, but it's also a challenge in terms of the innovation piece."

The Pentagon has long striven to strike a balance within the aerospace and defense industry between allowing efficient consolidation and maintaining a healthy level of competition. At the same time, however, it has rarely tried to stymy deals of this particular sort.

Precedent has been set

The only other federal agency that could reasonably block Lockheed's acquisition of Aerojet is the Federal Trade Commission, which is responsible for ensuring that private industry remains dynamic and competitive. However, its approval of Northrop's purchase of Orbital ATK has set a precedent that it might be loath to overturn, as aerospace and defense industry consultant Loren Thompson pointed out on Feb. 16:

"Orbital was a bigger player and arguably better positioned in the engine business. Blocking Aerojet's acquisition while letting Orbital's stand would amount to implementing a double standard in antitrust cases."

Northrop's takeover of Orbital ATK, then the nation's largest independent rocket motor manufacturer, likely had a larger impact on overall industry competition than would Lockheed's proposed acquisition of Aerojet.

My verdict

Ultimately, I see little prospect of Raytheon's challenge to Lockheed and Aerojet amounting to much. A clear precedent exists for similar deals and, as the Wall Street Journal observed on Dec. 23, this particular acquisition will be "more a case of vertical integration than elimination of the competition."

While nothing is ever certain in the high stakes world of mergers and acquisitions, it seems highly likely to me that Lockheed and Aerojet will get their way in the end.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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