M&A players beware. DOD is watching.
The rapid pace of mergers and acquisitions among defense contractors is forcing DOD officials to closely monitor the activity. What are they afraid of?
The rapid pace of merger and acquisition activites among the large defense contractors is forcing the Defense Department to more closely examine the relationships between companie to avoid conflicts of interest,one DOD official said recently.
“The department does not seek to know the exact details and reasoning behind every supplier relationship, but we do need to better understand the industrial base’s nervous system, circulatory system, and bone structure,” Frank Kendall, principal deputy undersecretary of defense for acquisition, technology, and logistics, testified May 3 before the Senate Armed Services Committee’s Emerging Threats and Capabilities Subcommittee.
“The department is very conscious that the top tiers of the defense industry have already consolidated significantly,” Kendall said. “We do expect some increased activity at the middle and lower tiers — activity that we will monitor closely.”
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Federal officials have proposed rules regarding the conflicts. The most recent proposal would allow the government to take on more risks related to conflicts of interest if it wouldn't affect other companies or the procurement process in general. In 2010, DOD offered a proposal with less flexibility.
The consolidation in the top tier may benefit small and midsize contractors, particularly as senior DOD acquisition officials are pushing the contracting offices for more competition as part of their own approach to contracting improvements.
“While working with our traditional suppliers as they reshape their business models and practices, the department also encourages new sources of competition in the form of new entrants into our market,” Kendall said.
Although competition has always been a part of federal purchasing, Ashton Carter, undersecretary of defense for acquisition, technology, and logistics, has emphasized competition as one of the primary tenets of his Better Buying Power Initiative. The program is an attempt to get DOD the best workmanship from contractors for its projects.
“We want to do things where people are always looking over their shoulder a little bit at the guy who could come and take their business away,” Kendall said.