A spate of military-industrial consolidation in the US is being driven in part by a resurgence of spending on rocket weapons.
This week, United Technologies and Raytheon announced a merger that would create a huge new space and defense conglomerate. Not everybody thinks the idea makes sense, including activist investor Bill Ackman. But there is logic at work here.
The latest tie-up follows the 2018 purchase of space-focused Orbital ATK by defense contractor Northrop Grumman. Both Raytheon and Orbital had extensive experience in sold-fueled rockets: Raytheon is a key manufacturer of the Patriot Missile system and Orbital builds the interceptors to be launched at nuclear missiles targeting the US.
Take a look at this chart of government spending in two major categories—air- and missile-defense systems, and bombs and missiles purchased for aircraft and artillery. The data was compiled by defense acquisition researchers at the Center for Strategic and International Studies:
Between 2015 and 2018, there’s been a 30% increase in air- and missile-defense spending, and a 56% percent increase in missile and ordinance purchases. That is driven by a number of factors, maybe most importantly nuclear proliferation in North Korea, which has led to increased investment in missile defense. The Trump administration has also pushed to increase offensive capabilities as it withdraws from arms-control deals. Finally, defense spending in general has grown under this administration.
Exports of missile-defense systems in particular have grown in recent years as a way to reward allies—and, presumably, investors in military contracting firms. So far in 2019, Raytheon has been approved by the US government to export nearly $2.5 billion of missile-related goods.
Gregory Sanders, who researches federal defense contracting at CSIS, says that missile spending at home and abroad isn’t the only reason for the consolidation. The combined companies are promising to cut fat from their supply chain, which could mean more profit and lower costs for purchasers, as well as potential layoffs.
Monopoly effects could lead to higher costs for the Defense Department, though a recent study conducted by Sanders and his colleagues suggests that there isn’t a relationship between major cost-overruns and consolidation. Indeed, one possible result of the United Technologies deal is an entity that could compete directly with Lockheed Martin and Boeing, the two largest US defense contractors.
Just as in the consumer tech sector, the traditional way of evaluating market concentration—examining consumer prices—is getting a re-evaluation. One concern for military planners is whether consolidation will lessen the amount of investment in research and development and hurt US defense innovation. That should be a concern, since one key subtext in missile defense is whether the systems can actually be relied upon to stop enemy attacks. The latest evaluations are not looking good.