Pentagon Has Limited Clout on Raytheon-United Technologies Deal

(Bloomberg) -- Raytheon Co.’s planned merger with United Technologies Corp. is under Pentagon review even though military leaders won’t get to make the call on approving one of the biggest defense industry deals ever.

“Under Secretary Ellen Lord is engaging with industry leadership to understand the implications and governance as a result of this acquisition,” Lieutenant Colonel Mike Andrews, a department spokesman, said, referring to the Pentagon’s acquisition chief in a statement Monday.

The Pentagon will submit its views to the Justice Department or the Federal Trade Commission. The two antitrust regulators divide decisions on cases and haven’t indicated which will make the judgment this time.

The Defense Department looks forward to working with the combined company “to provide the best capabilities our warfighters deserve, at the greatest value to the taxpayer,” Andrews said.

In a first sign of opposition, Representative Ro Khanna, a member of the House Armed Services Committee, said he will seek a congressional hearing on the merger and its impact.

“This pending deal will likely raise prices, harm workers, stifle competition, and undermine innovation,” the California Democrat said in a statement. “We cannot have the taxpayers and our soldiers bear the cost for the profits of defense contractors.”

United Technologies fell 1.7% to $125.84 at 9:51 a.m. in New York, posting the biggest drop on the Dow Jones Industrial Average for the second straight day. Raytheon slid 2.4% to $182.66.

Shanahan’s Role

Acting Defense Secretary Patrick Shanahan may have a limited role in his department’s review because defense chiefs usually leave the crafting of the Pentagon’s advice to its chief weapons buyer and its industrial base professionals.

But Shanahan may be kept well-informed on the issues involved because Eric Chewning, his chief of staff, served as head of the Defense Department’s industrial base and mergers review office from October 2017 to January. Chewning oversaw reviews including Northrop Grumman Corp.’s purchase of Orbital ATK.

The Senate Armed Services Committee may press Shanahan about the merger -- and whether he should recuse himself from deliberations on it because of his past role as an executive with Boeing Co., a United Technologies customer -- at his expected confirmation hearing for defense secretary.

Shanahan has recused himself from decisions on Boeing contracts, and the Pentagon’s inspector general cleared him of allegedly making inappropriate comments supportive of the Chicago-based planemaker.

The combined Raytheon Technologies Corp. would have about $70 billion in sales and a product lineup from jet engines to missiles and cockpit electronics to cybersecurity services.

Lord, the Defense Department’s acquisitions chief, hasn’t issued broad policy statements on defense mergers, unlike some of her predecessors.

Top Suppliers

In 2011, Ashton Carter, who was then the chief weapons buyer and later became defense secretary, said the Pentagon would welcome U.S. defense company mergers, spinoffs and divestitures provided they didn’t involve the top five or six suppliers acquiring each other.

In 2015, the chief weapons buyer for the Pentagon under the Obama administration, Frank Kendall, was lukewarm toward Lockheed Martin Corp.’s acquisition of United Technologies’ Sikorsky unit, which the Justice Department approved that year.

Kendall said after the deal was approved that it “moves a high percentage of the market share for an entire line of products -- military helicopters -- into the largest defense prime contractor, a contractor that already holds a dominant position in high-performance aircraft due to the F-35 winner-take-all approach adopted over a decade ago.”

“Mergers such as this, combined with significant financial resources of the largest defense companies, strategically position the acquiring companies to dominate large parts of the defense industry,” he said.

After the Lockheed merger, Kendall argued to expand criteria for merger reviews by the Justice Department and the FTC to include an increased assessment of the national security impact beyond questions of economic concentration.

Warning that with “size comes power,” Kendall said the Pentagon would work with the Justice Department and Congress to preserve a diverse industrial base.

Trump’s Concerns

President Donald Trump expressed some concern about the latest merger on Monday morning.

“When I hear they’re merging, does that take away more competition?” Trump said in an interview on CNBC. “It’s hard to negotiate when you have two companies and sometimes only one bid.” Pressed on whether U.S. regulators would seek to block the deal, Trump said, “Only if they have the same products, that would be the thing that bothers me most. They have some overlap as I understand.”

Although United Technologies and Raytheon overlap in that they both make intelligence, surveillance gear and reconnaissance payloads for drones, there’s little other duplication, according to analysts.

While Trump “needs to look populist for his base, in reality he can be counted on to fall in line with business interests, except where trade is concerned,” said defense analyst Richard Aboulafia of the Teal Group.

Trump’s “unlikely to create a problem for this merger,” he said. “And since there’s no overlap, I don’t see any other regulators creating problems either.”

The Raytheon-United Technologies merger is set to close in the first half of 2020, after United Technologies completes the separation of its Otis elevator and Carrier air-conditioner businesses, the companies said in a statement Sunday. While billed as a merger of equals, current United Technologies shareholders will own most of the combined company, which is expected to be valued at well over $100 billion, according to Bloomberg Intelligence.

--With assistance from Richard Clough.

To contact the reporter on this story: Tony Capaccio in Washington at acapaccio@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net, Larry Liebert, Brendan Case

©2019 Bloomberg L.P.