Raytheon, United Technologies merger threatens Pentagon bargaining ability

The military-industrial complex is riding higher than ever.

Nearly 60 years after President Dwight D. Eisenhower warned of the dangers of a too-close partnership between the Pentagon and defense industry, lawmakers and scholars believe the alliance has reached a new pinnacle of power under President Trump.

This week, Raytheon and United Technologies announced plans to merge and create an aerospace and defense behemoth with $74 billion in annual revenue. The deal is so massive that even Mr. Trump has expressed concern that it could erode competition.

A day later, the Defense Department announced a $34 billion agreement with top contractor Lockheed Martin to build another round of F-35 fighter jets. It’s the single largest defense contract in U.S. history, resetting the bar on how much money a firm can make doing business with the Pentagon.

At the same time, former Boeing executive Patrick M. Shanahan is running the Defense Department while Mr. Trump and his national security team have made promoting arms exports a central part of U.S. foreign policy. Critics say the acting Pentagon chief’s past career blurs the line even further between the military and the companies that supply its arsenals and build its ships.

Taken together, some analysts argue that those developments highlight how the armed forces and their industry partners have stockpiled power and influence to an unprecedented level.

“These huge firms are likely to have more power in bargaining with the Pentagon at the expense of taxpayer interests,” said William Hartung, director of the Arms and Security Project at the Center for International Policy. “And they will have more lobbying clout, both because they will have more funds to make campaign contributions and hire lobbyists and because they will have facilities in more states and localities, which will give them additional leverage over key members of Congress.

“Add to this that the nominee for secretary of defense is a former Boeing executive and that the president has been touting U.S. companies relentlessly as he presses for more foreign arms sales, and it is clear that the defense industry’s potential influence is on the rise,” said Mr. Hartung, author of the book “Prophets of War: Lockheed Martin and the Making of the Military-Industrial Complex.”

Industry leaders dispute that characterization.

Military officials note that Mr. Shanahan was cleared by a Pentagon inspector general’s investigation into allegations that he improperly favored Boeing while working inside the Defense Department. They also argue that the Raytheon-United Technologies merger will have little effect on competition because the firms operate on different sides of the defense spectrum.

“They’re not competing against each other,” retired Air Force Gen. Herbert “Hawk” J. Carlisle, now the president and CEO of the National Defense Industrial Association, told The Washington Times on Wednesday.

“The other worry is that they get so big, they’re so powerful, that they can dictate terms in some cases,” he said. “And that’s always a concern. But you know what? Boeing is huge. Lockheed Martin is huge. Walmart is huge. Amazon is huge.”

The companies make similar arguments and deny that the deal reached this week, which regulators and shareholders still must approve, will have any direct impact on competitive contracts or prices.

“We are complementary, not competitive,” Raytheon CEO Tom Kennedy told CNBC in an interview this week. He said the combined firm is expected to add jobs, not cut them.

In a press release announcing the deal, United Technologies Chairman and CEO Greg Hayes said the new firm “will define the future of aerospace and defense.”

Size and leverage

But Mr. Trump and key lawmakers fear that companies could become so powerful that Congress and other institutions could lose their leverage.

“When I hear United and I hear Raytheon, when I hear they’re merging, does that make it less competitive? It’s already not competitive,” the president told CNBC on the day the deal was announced. “I just want to see competition. They’re two great companies. I love them both. But I want to see that we don’t hurt our competition.”

Despite his reservations, Mr. Trump routinely touts expanding exports markets for U.S. defense companies as a central plank of his foreign policy. In April 2018, the administration announced an overhaul of U.S. arms export policies to speed up approvals of deals and to increase the role of senior government officials to close deals. The policy also gave greater weight to business interests in sales decisions that have long prioritized human rights.

Some Democrats on Capitol Hill have a more philosophical fear.

“I am simultaneously concerned about the increasingly corporate culture at the Department of Defense and the growing consolidation of the defense industry,” Sen. Richard Blumenthal, Connecticut Democrat, said in an interview. “Both trends could have adverse impacts on innovation, competition and costs, while increasing the potential for private companies to unduly influence national security decisions.”

More broadly, lawmakers long have objected to the increasingly porous line between industry and Defense Department leadership.

Sen. John McCain raised concerns during Mr. Shanahan’s confirmation hearings two years ago to become assistant secretary of defense, citing his long career at Boeing. “I have to have confidence that the fox is not going to be put back into the henhouse,” said the Arizona Republican, who died in August.

Concerns about the industry’s power certainly are not new. They include shoddy contractors and “merchants of war,” a running theme in conflicts from the Civil War to World War I and World War II.

Some historians say the current path of the industry is reminiscent of the 1990s, when a series of major mergers changed the face of the defense sector. Throughout that decade, the deal that created Northrop Grumman, a merger between Boeing and its former rival McDonnell Douglas and other massive corporate combinations consolidated power in the defense sector and helped create today’s landscape.

There are clear signs that the industry is in the midst of a similar shift. Northrop Grumman last year completed a $7.8 billion purchase of Orbital ATK, a leading defense and space company.

That merger and the Raytheon-United deal, analysts say, are merely the latest moves in a trajectory that began decades ago.

“What you’re seeing is the culmination of a 30-year trend,” said Michael Brenes, a Yale University historian who has studied the defense industry extensively. “Particularly at the end of the Cold War, you saw these gigantic mergers.”

Even in that post-Cold War environment, however, the government eventually drew a line. Federal regulators in the late 1990s raised antitrust objections to a proposed megadeal between Lockheed Martin and Northrop Grumman and eventually killed negotiations between the two companies.

Analysts say it’s unlikely that the Trump administration will take similar action.

“In a very narrow antitrust sense, it’s probably less problematic,” Mr. Hartung said of the Raytheon-United deal. “But my greater concern is having such powerful companies basically running the show in terms of the defense industry.”

Industry leaders say more consolidation isn’t necessarily a bad thing.

“I think the taxpayer … may be able to get things for a little bit cheaper,” Gen. Carlisle said. “I think there is more of this on the horizon … because in many cases it’s smart business.”