How will new antitrust policy affect military contracting? The strongest effect could be on startups, whose liquidity horizons could greatly lengthen.

Just this month, new merger guidelines emerged from the Justice Department and the Federal Trade Commission, and to some alarm. As Elizabeth Nolan Brown wrote for Reason magazine immediately thereafter, the hint therein seemed to be “Maybe Just Don't Merge Anything at All.” In thinking about how this new articulation of old-is-new-again policy might affect investors and industrialists in military contracting, I have formulated four points:

1. The new merger guidelines seem severe, but may not greatly matter with large contractors. Horizontal mergers amongst large military contractors have been effectively forbidden for at least a decade, even if, as I will note below, they may not be so pernicious in those markets. Vertical mergers have come under serious scrutiny, which is why Lockheed Martin’s attempted purchase of engine supplier Aerojet Rocketdyne was disallowed. Conglomerate mergers have merely been attracting concern, which is why the entirely unrelated firm L3Harris was allowed to buy Aerojet Rocketdyne. The new guidelines do not say too much about conglomerate mergers, so the overall effect may be muted.
2. High-quality startups need prices and pathways—including options for merger. The problem may lie with startups, if enthusiasm for antitrust enforcement turns in that direction. Startups in any industry have two primary possibilities for liquidity events: public offering or acquisition. Over the past several decades, almost all of the successfully scaled startups in military contracting that did go public were eventually acquired. Acquisition in many cases may have been a more efficient path to building dynamic industries. Foreclosing acquisition as an option may thus chill interest in investment, at least in the short run.
3. If averse to merger, the military needs to nurture. The government’s role as regulator often gets in the way of its roles of customer and particularly sponsor, in the market that it alone creates. If most mergers were disallowed, procurement bureaucrats and industrial policymakers would need to engage much more seriously with investors and industrialists building startups, if they wanted that industrial structure to flourish. I have some reason to doubt whether than will happen.
4. Startups in military contracting should be built for the long haul. Independent growth by military contractors has almost invariably attracted interest from industry for acquisition. Antitrust policies change, so one approach is to wait out the new regime. Our research into successful startups suggests further guidance. If you are considering starting a military contractor, and you want to make a few hundred million selling it to someone, you should prepare for a twenty-year experience. If you want to make a huge industrial contribution to a war effort, it is best to start your company a decade before that war starts. Ten years after that, during the inevitable downturn, maybe you can sell it to someone, or even take it public. The new merger guidelines give us reason to wonder whether such time horizons will persist.

One further point concerns corporate alliances. In a world with far fewer mergers amongst military contractors, this alternative approach to corporate governance and production may become yet more interesting. I will continue earlier research on this point later this year.

My nine-page research note elaborates on these points, and is available here: Download On Antitrust and Military Contracting 20230729.