The US GAO has said the DoD should have better insight into the risks from corporate M&A in the defence sector, which it says can affect competition for contracts, increase prices or reduce innovation.
Outlining its concerns in a 17 October report, the GAO stated that it assesses “only a portion” of defence mergers and acquisitions each year, and only then generally when the US antitrust agencies – the Department of Justice and Federal Trade Commission – ask for DoD’s input for antitrust reviews of these transactions.
According to the GAO, with this approach, the DoD “may overlook critical defence industry risks”, with “hundreds” of defence companies undergoing M&A each year.
When M&A present risks to competition, the DoD’s Industrial Base Policy office also works with the antitrust agencies, which review and regulate M&A that may substantially lessen competition.
However, the GAO said that the DoD’s insight into defence M&A is “limited”, with the Industrial Base Policy’s M&A office and DoD stakeholders assessing an average of 40 M&A per year in fiscal years 2018 through 2022, which represents a small portion of defence M&A.
The US DoD’s most recently published statistics on defence M&A, which were included in its Fiscal Year 2017 Annual Industrial Capabilities report, indicated that approximately 400 defence M&A occurred annually.
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Most DoD assessments are initiated in response to antitrust reviews of large M&A valued over a certain dollar threshold, currently $111.4m. The GAO stated that US DoD officials noted that the M&A office – which is comprised of two to three staff – does not have the staff resources to initiate more assessments of smaller M&A that may also present risks.
Assessing whether the M&A office has adequate resources to meet its responsibilities and clarifying which defence suppliers’ M&A should be prioritised would help the DoD better assess risks. In addition, the US DoD “generally does not monitor whether risks identified in its M&A assessments were realised”, indicating a potential lack of follow up on previously outlined industrial risks and inability to mitigate similar instances in future.
Dip in North America M&A in Q1 this year
According to GlobalData analysis, the global aerospace, defence and security (ADS) sector M&A market in Q1 2023 recorded deals worth $4.7bn, a drop of 63% from the $12.6bn deal value in Q4 2022. In terms of deal volume, there was a marginal growth from 72 deals in Q4 2022 to 74 M&A deals in Q1 2023.
The North America region led the M&A deal activity in the ADS sector in Q1 2023, although deal value dropped by 78% quarter-on-quarter. The region witnessed 44 deals worth $2.4bn in Q1 2023. Space systems and robotics were the top themes driving ADS M&A activity in Q1 2023.
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