Aerospace & Defense Series: Behavioral Remedies Remain A Viable Solution For Vertical Mergers In The Defense Industry

Summary

The recent FTC decision in the Northrop Grumman / Orbital ATK matter has shed light on the agency's vertical merger enforcement policy and outlined a path to antitrust merger clearance for the Aerospace and Defense industry. The FTC's June 5 consent decree shows behavioral remedies remain a viable solution if the parties can prove both that the DoD would benefit from the transaction and that those benefits would be lost if the agency required a divestiture.

In Depth

A recent decision at the US Federal Trade Commission (FTC) has shed light on the agency's vertical merger enforcement policy and outlined a path to antitrust merger clearance for the Aerospace and Defense industry. Despite recent remarks from both the FTC and the US Department of Justice Antitrust Division (DOJ) denouncing behavioral remedies as a way to "fix" anticompetitive issues in vertical transactions, the FTC's June 5, 2018 consent decree with Northrop Grumman and Orbital ATK shows behavioral remedies remain a viable solution if parties can prove the Department of Defense (DoD) will benefit from the transaction, and that those benefits would be lost if the agency required a divestiture to resolve the competitive concern. Merging parties in the Aerospace and Defense industry would be wise to follow the FTC's reasoning and present evidence to the agency highlighting:

Merger-specific cost savings guaranteed to flow through to customers Higher quality products at lower prices resulting from the merger That a divestiture would eliminate those cost and quality benefits to consumers I. Vertical Mergers and Their Concerns

A vertical merger occurs when two firms at different levels of the supply chain combine. The most prominent competitive concern in a vertical transaction is what is referred to as input foreclosure. Under this theory, a downstream system supplier merges with an upstream manufacturer of an "essential" input, giving the merged entity the ability to competitively disadvantage its systems rivals by raising their cost for the essential input or refusing to supply the input altogether. For instance, in the Northrop Grumman/Orbital ATK acquisition, Orbital ATK provided Northrop Grumman as well as its competitors for DoD missile systems with Solid Rocket Motors, a component necessary to compete as a missile supplier. Under the input foreclosure theory, a merged Northrop Grumman/Orbital ATK would be able to deprive its competitors of Solid Rocket Motors and...