On October 17, 2023, the U.S. Government Accountability Office (“GAO”) published a report on mergers and acquisitions (“M&A”) in the defense industrial base. The report details the current M&A review process of the Department of Defense (“DOD”) and provides recommendations to proactively assess M&A competition risks.

Currently, DOD’s Industrial Base Policy (“IBP”) office, with input from DOD stakeholders, provides DOD’s recommendations on transactions that could affect the defense industrial base, when asked to do so by the Department of Justice or the Federal Trade Commission (“the Antitrust Agencies”). While DOD does not have a formal role in deciding the outcome of an antitrust review of a transaction, it informs the Antitrust Agencies’ review as an affected “customer”—for example, providing input on potential competitive effects of a transaction.

The GAO report concludes that DOD has, to date, had a reactive role in defense industry M&A review. As a result, the report observes that DOD has missed opportunities to identify transactions that could negatively impact the defense industrial base and to manage the full range of risks that such transactions can present for DOD programs. The GAO believes that DOD’s historically reactive posture has been due in part to a lack of sufficient guidance and resources being made available to those at the DOD who are responsible for providing the DOD’s views to the Antitrust Agencies. For example, current DOD M&A policy, DOD Directive 5000.62, outlines the department-wide policy for assessing M&A in the defense industrial base, explaining that DOD should consider the effect of M&A on competition for prime contracts and subcontracts, on national security, and on innovation risks, but it does not provide a methodology for such assessments.

Further, the report observes that IBP has had limited resources, and as a result it has had limited capacity to look out for and monitor transactions that may be reportable to the Antitrust Agencies under the HSR Act but do not have an obvious defense connection, to look for and consider the effects of defense-related M&A that falls outside the scope of the HSR Act, or to conduct macro-level trend analyses or retrospectives. As a result, the report notes that IBP officials tend to prioritize and focus on large transactions regarding which the Antitrust Agencies seek DOD’s views, and to use those factors as a proxy for identifying the highest risk M&A. The GAO report observes that between fiscal years 2018 and 2022, DOD assessed approximately 40 M&A transactions per year, the vast majority of which were above the HSR size of transaction threshold, and that is out of a total of approximately 400 defense-related M&A transactions per year. It also observes that DOD has only monitored two completed M&A transactions in the past 10 years, both at the Antitrust Agencies’ prompting.

GAO has thus issued the following recommendations for DOD:

  • Provide direction to relevant personnel on assessing the full range of risks and benefits identified in DOD M&A policy.
  • Clarify which major defense supplier’s M&A transactions should be prioritized for DOD assessment.
  • Assess whether the IBP M&A office is adequately resourced.
  • Monitor the effects of concluded transactions in cases where DOD had identified risks, to determine if risks were realized or if additional action is needed.

DOD concurred with all four recommendations, stating it will soon promulgate new written DOD policy to provide guidance on conducting and prioritizing assessments, as well as monitoring completed M&A. DOD will also assess the design and implementation of an M&A monitoring mission and resources to support it. Additionally, IBP is requesting dedicated funding to support and increase its M&A work. These developments underscore that the Biden administration and DOD are highly focused on merger activity, including in the defense industrial base. Parties considering transactions in defense-related sectors should consider their regulatory strategy at an early stage and work with counsel to develop a holistic approach that takes into account the expanded role that DOD is likely to play in merger review going forward.

Tags: Antitrust, Competition, Mergers and Acquisition, national security
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Photo of Ross Demain Ross Demain

Ross Demain advises clients in complex antitrust matters, including mergers and acquisitions, joint ventures, and other transactions; government investigations; litigation; compliance; and trade association activities.

He has represented clients in civil and criminal investigations before the Department of Justice, Federal Trade Commission, and…

Ross Demain advises clients in complex antitrust matters, including mergers and acquisitions, joint ventures, and other transactions; government investigations; litigation; compliance; and trade association activities.

He has represented clients in civil and criminal investigations before the Department of Justice, Federal Trade Commission, and state antitrust enforcers, and in private antitrust litigation as both plaintiffs and defendants. Ross also regularly helps clients assess and comply with their premerger notification obligations under the Hart-Scott Rodino (HSR) Act.

Ross has significant experience helping clients achieve positive outcomes across a variety of industries and sectors, including technology, media, electronics, cable, broadcast, industrial products, energy and natural resources, defense, pharmaceuticals, medical devices, sports, and financial services.

Representative litigation victories in which Ross has been involved include:

  • obtaining dismissal of an antitrust claim in a precedent-setting case at the International Trade Commission (ITC) that confirmed that the antitrust injury requirement applies to claims brought under Section 337 (ITC 2018);
  • achieving one of the first dismissals of a corporate defendant on jurisdictional grounds in the sprawling, In re Automotive Parts Antitrust Litigation (E.D. Mich. 2013);
  • attaining dismissal of a purported class action antitrust suit brought by retired NFL players alleging a conspiracy to restrain a market for the sale of their images and likenesses, Washington v. National Football League (D. Minn. 2012); and
  • obtaining an early dismissal of novel resale price maintenance claims brought in federal court under New York’s Donnelly Act, Worldhomecenter.com, Inc. v. KWC America, Inc. (S.D.N.Y. 2011).
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Photo of Jim O’Connell Jim O’Connell

Jim O’Connell advises clients on their critical antitrust matters, including mergers and acquisitions, joint ventures, and other transactions; licensing arrangements and other business practices; government investigations; and litigation. In connection with his merger practice, he also regularly helps clients assess and comply with…

Jim O’Connell advises clients on their critical antitrust matters, including mergers and acquisitions, joint ventures, and other transactions; licensing arrangements and other business practices; government investigations; and litigation. In connection with his merger practice, he also regularly helps clients assess and comply with their obligations under the HSR Act and comparable merger control regimes around the world.

Clients and peers recommend Jim for his knowledge of antitrust law and his ability to provide expert and practical guidance. He is also recommended for his detailed understanding of the people and processes of the U.S. antitrust enforcement agencies, which he applies to help his clients navigate their most critical antitrust challenges successfully and efficiently. Legal 500 has described him as a “well-respected” practitioner who is “well connected with the DOJ” and recognized by clients for his ability to “quickly develop a high level of company-specific expertise.”

Jim has represented clients in a broad range of industries and sectors, including leading companies in the e-commerce, pharmaceutical, medical device, financial services, telecommunications, electronics, cable, broadcast, alcoholic beverages, consumer products, industrial products and heavy manufacturing, energy and natural resources, steel, aerospace, defense, chemicals, gaming, and software industries.

Jim joined Covington after over five years of public service with the Antitrust Division of the U.S. Department of Justice, where he served in several leadership roles, including as Deputy Assistant Attorney General and Chief of Staff. As Deputy AAG, he had responsibility for the Division’s appellate program and for the development of its major legislative and policy positions, such as those regarding intellectual property and the enforcement of Section 2 of the Sherman Act. His duties also included managing the Division’s relations with its enforcement counterparts around the world. This extensive international enforcement experience enables him to provide his clients highly informed and practical assessments of their U.S. and non-U.S. antitrust risks. Prior to his government service, Jim practiced antitrust law at an international New York-based firm.

A frequent speaker and writer on antitrust law and policy issues, Jim has also been a leader in the Antitrust Section of the American Bar Association for many years, serving in such positions as Chair of the editorial board of Antitrust, the Section’s magazine, and as Co-Chair of the Section’s Federal Civil Enforcement Section. He is currently a member of the Section’s leadership Council. He has also testified before the U.S. Congress and the Antitrust Modernization Commission, and he has served as a non-governmental advisor to the International Competition Network, which brings together competition enforcement authorities, academics, and leading practitioners from around the world to foster the development of best practices and encourage convergence on matters of antitrust policy.

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