Northrop Grumman dismisses speculation that its 2018 acquisition of Orbital ATK could be challenged

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Northrop Grumman dismisses speculation that its 2018 acquisition of Orbital ATK could be challenged

by Sandra Erwin — July 28, 2022Northrop Grumman GEM-63 solid rocket motors produced for United Launch Alliance. Credit: Northrop GrummanCEO Kathy Warden: ‘We don’t believe this matter will have a material adverse impact to our company’WASHINGTON — Northrop Grumman does not expect an ongoing antitrust review of its acquisition of Orbital ATK to have any “adverse impact” on the company, CEO Kathy Warden said July 28.During a second-quarter earnings call, Warden was asked to comment on news reported by Politico July 22 that the Federal Trade Commission is weighing legal action against Northrop Grumman for alleged violations of the 2018 agreement with the U.S. government that allowed it to acquire the space and defense firm Orbital ATK.The FTC presumably is looking into anti-competitive actions in the solid rocket motors market. Orbital ATK before it was acquired by Northrop was one of just two suppliers of solid rocket motors, along with Aerojet Rocketdyne. But Orbital ATK was the dominant supplier of large solid rocket motors that power U.S. intercontinental ballistic missiles. Northrop Grumman in September 2017 announced a deal to acquire Orbital ATK for $7.8 billion. The acquisition was approved in June 2018.During that same time period, Northrop Grumman and Boeing were competing for a huge Air Force contract to develop and build the next-generation ICBM known as the Ground-Based Strategic Deterrent to replace the Minuteman 3.Boeing in July 2019 informed the Air Force it was dropping out of the GBSD competition arguing that it faced an insurmountable disadvantage because of Northrop’s dominance of the solid rocket motors market following its acquisition of Orbital ATK. Under the terms of the Orbital ATK acquisition, Northrop Grumman was obligated to supply solid rocket motors to competitors “on a non-discriminatory basis” and in programs where Northrop is also bidding as a prime. Northrop also had to set up firewalls to prevent any use of proprietary information in a manner that harmed competition.But Boeing alleged that the arrangement still gave Northrop an overwhelming advantage. The FTC over the past several years has been looking into the matter. The Air Force in September 2020 awarded Northrop Grumman a $13.3 billion contract for GBSD. Warden said “there’s been some recent speculation based on the status of that investigation and a broad range of possible next steps that the government might attempt to take.”According to the Politico report, the FTC could seek to toughen the terms of the deal or even sue to reverse the merger. Warden suggested that is highly unlikely. “I’ll say that we don’t see merit or precedent for most of those scenarios. We continue to maintain that we don’t believe this matter will have a material adverse impact to our company. So I won’t speculate what the size [of the impact] will be because we believe it could be zero, and certainly isn’t material.”From the time the acquisition was announced in September 2017 until it was approved in June 2018, the Department of Defense and the FTC “spent many months looking at the pro-competitive aspects of the deal, which there were many, and any anti-competitive risk before they approved the deal,” said Warden. “During this period, the government identified only one concern, and it was around solid rocket motors. And so we agreed to a consent order to address that concern. Over the past four years, we’ve executed an extensive compliance program and worked with the government very closely in line with the terms of the order,” Warden added. “We believe we’ve been and we continue to be in compliance with the order.”The U.S. government’s approval of the Northrop-Orbital merger was brought up by Lockheed Martin when it sought to acquire Aerojet Rocketdyne in a $4.4 billion deal announced in December 2020. The FTC in January 2022 sued to block the acquisition on grounds that it would create a monopoly for rocket and missile propulsion systems. Lockheed Martin had argued that its planned acquisition of Aerojet should follow the same template as the Northrop-Orbital deal. But the FTC disagreed and Lockheed Martin in February 2022 terminated the agreement to buy Aerojet. Since the start of the Biden administration, FTC Chair Lina Khan has indicated the agency would challenge what it considered anti-competitive industry consolidation. In the wake of the failed Lockheed-Aerojet deal, the Defense Department in a February 2022 report said it would “strengthen oversight” of industry mergers amid concerns that corporate consolidation is undermining U.S. competitiveness.
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