Magazine article National Defense

Ash Carter Could Face Big Decisions on Industry Consolidation

Magazine article National Defense

Ash Carter Could Face Big Decisions on Industry Consolidation

Article excerpt

The Pentagon in recent years has frowned on mega-mergers of top weapons contractors, a policy that is likely to continue under soon-to-be confirmed Defense Secretary Ashton B. Carter.

But Carter could face challenges to that policy in the near future as defense contractors weigh their options in a tight market. There is growing speculation that such a test might come in 2015 or 2016, following the award of a major Air Force contract to build a new stealth bomber.

The competition for the $100 billion Air Force long-range strike bomber program includes three of the Pentagon's top contractors. The contest pits Northrop Grumman against a Boeing-Lockheed Martin team.

Whoever loses the bomber is likely to come under pressure from investors to make a big move--to either merge with a competitor or acquire a piece of one, predicts aerospace industry analyst Richard Aboulafia, vice president of the Teal Group.

The Air Force said it plans to make an award some time in 2015. It has budgeted nearly $14 billion for long-range strike bomber research-and-development work through 2020, and procurement would begin some time in the next decade. Additional funding is said to be tucked in the Pentagon's classified "black" budget.

For the companies, the contest is a matter of long-term survival because the bomber is the only combat aircraft program up for grabs that is likely to go into production in the next decade.

"It's a fascinating horserace ... and the outcome could precipitate a big merger or acquisition," Aboulafia told executives at a recent meeting of the National Aeronautic Association.

Only Lockheed Martin can afford to lose the bomber contract and still have certainty that it will remain a combat aircraft prime contractor, as it will be producing the F-35 joint strike fighter for decades. …

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