Published on May 02, 2018
The Defense Department is leaning toward recommending Northrop Grumman’s proposed Orbital ATK acquisition be conditionally cleared by the Federal Trade Commission, sources familiar with the matter said.
FTC staff is nearing the end of its antitrust review of the two defense contractors’ planned merger and could make its own recommendation to the agency’s front office as early as this week, the sources said.
While the language of DOD’s recommendation is still being drafted, it likely will include non-discrimination clauses that require Northrop Grumman post merger to sell to its rivals Orbital ATK solid rocket motors that are of reasonable quality, fairly priced, and are assembled and installed by competent engineering teams, the sources said.
The DOD also will likely recommend the creation of firewalls to keep Northrop Grumman from getting information on Orbital ATK’s contractor customers, which include Northrop Grumman’s biggest competitors, the sources said. DOD’s views are vital on defense mergers because it’s such a large customer and the antitrust agencies usually defer to the department’s judgment on procurement and national security issues.
U.S. antitrust enforcers have in recent months raised concerns about clearing deals with conditions meant to restrict a company’s behavior. Those concerns stem from the constant monitoring required to ensure a company is following the conditions.
But in the Northrop Grumman/Orbital ATK case, an independent compliance officer associated with the Defense Department would enforce the conditions, the sources said.
The deal will be one of the first reviewed by incoming FTC Chairman Joe Simons and the agency’s four new commissioners: Rohit Chopra, Christine Wilson, Rebecca Slaughter and Noah Phillips. The Senate confirmed the five new commissioners just last week, and Simons was sworn in yesterday as FTC Chairman.
Ellen Lord, under secretary of defense for acquisition and sustainment, must sign off on the DOD recommendation.
DOD spokesperson Heather Babb declined to comment, citing the department’s ongoing review. Spokespeople for the FTC and Orbital ATK declined to comment. Northrop Grumman spokespeople didn’t respond to multiple requests for comment.
Solid rocket motors at center of antitrust concerns. The proposed Northrop Grumman/Orbital ATK combination has raised fears among industry participants that following the merger, Northrop Grumman would bar missile-manufacturing rivals such as Raytheon, Lockheed Martin and Boeing from buying Orbital ATK’s solid rocket motors or drive up costs for the increasingly popular engines. The concerns spurred FTC staff to issue a second request late last year to expand its review.
DOD favors the creation of the firewalls and the non-discrimination clauses, but antitrust enforcers’ support for such behavioral remedies is weakening. DOJ sued last month to block AT&T’s proposed acquisition of Time Warner, rejecting AT&T’s proposed behavioral remedy of establishing an arbitration system to settle complaints from rival video distributors and demanding divestitures instead.
The FTC has suggested a similarly hard line. Bruce Hoffman, the FTC’s acting Bureau of Competition director, said in a speech this month that the commission favors “structural remedies” like divestitures over behavioral fixes.
The FTC likely would find behavioral remedies appropriate in fewer than 10 percent of mergers it reviews, Hoffman said in response to a reporter’s question after his speech. The agency generally doesn’t like behavioral remedies because they require such vigilant monitoring by the agency, Hoffman said.
“We don’t have infinite confidence in checking on people,” he said at the time.
Hoffman is recused from the Northrop Grumman/Orbital ATK deal but has been acting as the new chairman’s surrogate on policy as Simons navigated his way through the confirmation process.