Signal: US GAO says Defense Department needs better insight into defense M&A risks

The U.S. GAO said the Defense Department should gain a better understanding of the risks of corporate mergers and acquisitions in the defense sector, which it says can affect competition for contracts, raise prices or reduce innovation.

Outlining his concerns in an October 17 reportthe GAO said it reviews “only a portion” of defense M&A each year, and only then generally when the US antitrust agencies – the Justice Department and the Federal Trade Commission – request the Defense Department’s input on antitrust reviews of those transactions.

According to the GAO, with this approach, the Defense Department “may be overlooking critical defense industry risks,” with “hundreds” of defense companies undergoing mergers and acquisitions each year.

When mergers and acquisitions present risks to competition, the Ministry of Development’s Industrial Base Policy office also works with antitrust agencies, which review and regulate mergers and acquisitions that may significantly reduce competition.

But the GAO said the Defense Department’s knowledge of defense M&A is “limited,” with the Civil Industrial Base’s M&A office and DoD stakeholders evaluating an average of 40 M&Es annually for financial years 2018 to 2022, representing a small portion of defense M&A. .

The US Department of Defense’s most recently released statistics on defense mergers and acquisitions, which were included in the FY 2017 annual Industrial Capabilities Report, indicated that approximately 400 defense mergers and acquisitions took place annually.

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Most DoD reviews are initiated in response to antitrust reviews of large mergers and acquisitions valued above a certain dollar threshold, currently $111.4 million. The GAO said Defense Department officials noted that the mergers and acquisitions office — which consists of two to three people — lacks the staff resources to begin more reviews of smaller mergers and acquisitions that may also present risks.

Assessing whether the M&A office is adequately resourced to meet its responsibilities and clarifying defense supplier M&A would help DoD better assess risks. In addition, the US Department of Defense “generally does not track whether the risks identified in M&A assessments have materialized,” suggesting a possible lack of tracking of past industrial risks and an inability to mitigate similar cases in the future.

Plunge in North American M&A in Q1 this year

According to GlobalData analysis, the global aerospace, defense and security (ADS) M&A market in Q1 2023 recorded deals worth $4.7 billion, down 63% from the $12.6 billion transaction value in Q4 2022. In terms of deal volume, there was a marginal increase from 72 deals in Q4 2022 to 74 M&A deals in Q1 2023.

The North America region led M&A deal activity in the ADS sector in Q1 2023, although deal value declined 78% quarter-on-quarter. The region saw 44 deals worth $2.4 billion in Q1 2023. Space systems and robotics were the top themes driving ADS M&A activity in Q1 2023.

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