Senior Vice President, International Regulatory Affairs & Antitrust, U.S. Chamber of Commerce
June 20, 2023
These days the Federal Trade Commission is challenging mergers based on little more than speculation. The FTC has brought such questionable challenges involving tech, aerospace, cloud gaming, health care, microchips, and the metaverse. Not surprisingly, the FTC has yet to prevail on its theories in court, even as one court rejected its tech suit and its own Administrative Law Judge rejected its position in a health care case.
Despite these mounting losses, a new merger will test whether the FTC will adopt an even more aggressive and speculative theory. Last December, L3Harris Technologies announced plans to acquire Aerojet Rocketdyne. On the surface, this merger appears to raise no genuine competitive concerns. Although both companies are defense contractors, L3Harris and Aerojet produce no overlapping products and thus are not horizontal competitors. L3Harris produces a range of electronic and wireless systems, while Aerojet manufactures propulsion systems and energetics for NASA, the Defense Department, and others.
Moreover, this combination also does not raise the sort of speculative vertical “foreclosure” concerns that the FTC has raised in other matters. In this case L3Harris and Aerojet are not in each other’s supply chains. Therefore, there is not even a theoretical scenario, in which L3Harris would use its purchase to block competitors from Aerojet’s technology.
On the other hand, the merger appears to offer numerous pro-competitive benefits. The transaction would allow the combined company to expand its manufacturing footprint, compete more effectively in international markets against much larger competitors, and accelerate innovation in new propulsion systems and hypersonics. Indeed, after the deal’s announcement, the Pentagon announced that it would invest $216 million to help Aerojet expand and modernize factories that manufacture the rocket motors used in missiles the United States has given to Ukraine.
Nevertheless, what should be a routine merger that is quickly cleared, the FTC has issued a second request to gather more evidence about the transaction. Senator Warren has asked the FTC to block the merger, apparently on the theory that mergers reduce competition because they reduce the number of companies in a market. That is true, except being form the same industry doesn’t mean the companies are in the same market.
If the FTC embraces this view and follows Senator Warren’s lead the agency will have possibly adopted its most radical theory yet. Based on publicly available information, this merger raises no horizontal concerns because the companies do not compete with each other, and no vertical concerns because the companies are not in the same supply chain. Senator Warren’s letter, however, suggests that the FTC should block any merger that reduces the number of companies in a particular industry even when they do not compete against each other.
That theory, prevalent in the 1960s, has been thoroughly repudiated by courts, scholars, economists, and the antitrust agencies themselves. Regulators worry about the level of competition, not the number of companies in an industry.
Thankfully, we live in a free-market economy where the government does not control the number of companies in an industry. If regulators attempt to block a merger, it should do so only based on strong evidence that the merger would reduce competition. Based on what we know now, if the FTC attempts to block this merger, the FTC will have taken its more aggressive step yet to reverse decades of sound, bipartisan merger policy.