Pentagon mostly fine with defense industry mergers

U.S. defense officials will not oppose defense contractor mergers as military spending comes down unless such moves involve the biggest six companies, Pentagon acquisition chief Ashton Carter said on Wednesday.

With Pentagon budgets expected to nearly flatten or contract as Washington grapples with the nation’s massive deficit, many in the defense sector have been whispering about a broad restructuring of the industry. Defense insiders have been waiting for months for a sign of where Pentagon leaders stand on mergers and acquisitions (M&A).

During an interview with Bloomberg Television, Carter offered a peek into the Defense Department’s thinking, saying DoD officials are “far from being discouraging to M&A activity — we're actually quite welcome to that because we expect industry to make adjustments to new times.”

But the Pentagon will not merely stand aside and endorse every proposal.

"We are down to about five or six very large prime contractors who do lots of different kinds of work for us and bid on many of our jobs,” Carter said. “In the interest of competition, we're not interested in seeing further consolidation or reduction in that number.”

The Pentagon would oppose any plan for consolidation among Boeing, General Dynamics, L3 Communications, Lockheed Martin, Northrop Grumman and Raytheon, Carter said.

“But with that exception, basically everything else is on the table,” Carter said.

Wall Street is already milling some M&A proposals, he said, and defense officials wanted to make their stance clear before any decisions are made.

In Congress, Democrats, Tea Party conservatives and some GOP leaders say Pentagon cuts must be on the table if lawmakers are serious about paring the deficit. But pro-defense Republicans want even bigger annual DoD budgets. 

The Pentagon’s top weapons buyer said he believes that “over time, members of Congress and the public will come to recognize everything we've been saying” about a “different era” with fewer dollars for the military.

“They know that we can't expect the defense budget to keep going up year by year. They know we're going to have to make tough choices,” Carter said. “That's what we have to do when we make these tough calls, so I hope that Congress will support us because there's no other way."