Mega-contractors don't dominate DOD

With the rampant merger and acqusition activity in the market, the conventional wisdom might say that the defense industry will be dominated by a few mega-players.

But not so says a new study from the Center for Strategic and International Studies.

“There is little evidence in the data that the defense industry is consolidating into an oligopoly dominated by a small number of incumbent firms,” the center's Defense Industrial Initiatives Group wrote in a report released on May 6. The report analyzed DOD’s contract spending and its supplier base.

In fact, the report states, contractors have been coming and going throughout in the past decade, despite the fact that the top five defense contractors retained their position from 1999 to 2009

“There were dynamic changes in the composition of the top 20 contractors in the industry” during the past decade, the report said.

M&A players beware; DOD is watching

However, another expert said it can be misleading to analyze the market by looking at a list of leading contractors. Instead, the true makeup of the market emerges by digging into specific types of goods and services. he said. The trends in competition and contractors emerge when looking at the number of companies capable of handling projects such as building unmanned aerial vehicles or surveillance satellites.

“Gross tabulations like ranking lists have never been effective predictors of the erosion happening to the defense industrial base,” said Bruce Williamson, an economist at the National Defense Business Institute at the University of Tennessee in Knoxville.

Either way, defense officials are concerned about the consolidation of companies.

“The department [DOD] is very conscious that the top tiers of the defense industry have already consolidated significantly,” Frank Kendall, principal deputy undersecretary of defense for acquisition, technology, and logistics, told the Senate Armed Services Committee on Emerging Threats and Capabilities Subcommittee on May 3.

And officials are predicting more merger and acquisition activity.

“We do expect some increased activity at the middle and lower tiers — activity that we will monitor closely,” Kendall said.

In further studying procurement data, CSIS found heath care companies rose closer to the top of DOD's suppliers with the strong overall services contracts and energy companies and ground vehicle producers grew in the products side.

The services sector was the fastest growing sector, and the list of contractors changed significantly from 1999 to 2009.

"This indicates that there is a healthy circulation of contractors in and out of the top positions by value of contracts awarded,” the report states.

CSIS also found the mid-sized companies still were squeezed by larger corporations and small firms.