On October 17, 2023, the U.S. Government Accountability Office (“GAO”) published a report on mergers and acquisitions (“M&A”) in the defense industrial base. The report details the current M&A review process of the Department of Defense (“DOD”) and provides recommendations to proactively assess M&A competition risks.
Currently, DOD’s Industrial Base Policy (“IBP”) office, with input from DOD stakeholders, provides DOD’s recommendations on transactions that could affect the defense industrial base, when asked to do so by the Department of Justice or the Federal Trade Commission (“the Antitrust Agencies”). While DOD does not have a formal role in deciding the outcome of an antitrust review of a transaction, it informs the Antitrust Agencies’ review as an affected “customer”—for example, providing input on potential competitive effects of a transaction.
The GAO report concludes that DOD has, to date, had a reactive role in defense industry M&A review. As a result, the report observes that DOD has missed opportunities to identify transactions that could negatively impact the defense industrial base and to manage the full range of risks that such transactions can present for DOD programs. The GAO believes that DOD’s historically reactive posture has been due in part to a lack of sufficient guidance and resources being made available to those at the DOD who are responsible for providing the DOD’s views to the Antitrust Agencies. For example, current DOD M&A policy, DOD Directive 5000.62, outlines the department-wide policy for assessing M&A in the defense industrial base, explaining that DOD should consider the effect of M&A on competition for prime contracts and subcontracts, on national security, and on innovation risks, but it does not provide a methodology for such assessments.
Further, the report observes that IBP has had limited resources, and as a result it has had limited capacity to look out for and monitor transactions that may be reportable to the Antitrust Agencies under the HSR Act but do not have an obvious defense connection, to look for and consider the effects of defense-related M&A that falls outside the scope of the HSR Act, or to conduct macro-level trend analyses or retrospectives. As a result, the report notes that IBP officials tend to prioritize and focus on large transactions regarding which the Antitrust Agencies seek DOD’s views, and to use those factors as a proxy for identifying the highest risk M&A. The GAO report observes that between fiscal years 2018 and 2022, DOD assessed approximately 40 M&A transactions per year, the vast majority of which were above the HSR size of transaction threshold, and that is out of a total of approximately 400 defense-related M&A transactions per year. It also observes that DOD has only monitored two completed M&A transactions in the past 10 years, both at the Antitrust Agencies’ prompting.
GAO has thus issued the following recommendations for DOD:
- Provide direction to relevant personnel on assessing the full range of risks and benefits identified in DOD M&A policy.
- Clarify which major defense supplier’s M&A transactions should be prioritized for DOD assessment.
- Assess whether the IBP M&A office is adequately resourced.
- Monitor the effects of concluded transactions in cases where DOD had identified risks, to determine if risks were realized or if additional action is needed.
DOD concurred with all four recommendations, stating it will soon promulgate new written DOD policy to provide guidance on conducting and prioritizing assessments, as well as monitoring completed M&A. DOD will also assess the design and implementation of an M&A monitoring mission and resources to support it. Additionally, IBP is requesting dedicated funding to support and increase its M&A work.
These developments underscore that the Biden administration and DOD are highly focused on merger activity, including in the defense industrial base. Parties considering transactions in defense-related sectors should consider their regulatory strategy at an early stage and work with counsel to develop a holistic approach that takes into account the expanded role that DOD is likely to play in merger review going forward.