More Cuts Could Change Pentagon View on Mergers

September 5, 2012

Senior Pentagon officials told industry last year that mounting budget pressures could result in increased mergers, spinoffs and market departures among weapons makers, although they said they did not believe consolidation was needed among the very largest companies in the sector.

But $500 billion in automatic across-the-board reductions that are due to start taking effect on January 2, on top of $487 billion already planned for the next decade, could change the department's thinking on mergers and many other issues, according to industry executives and military officials.

Brett Lambert, deputy assistant secretary of defense for manufacturing and industrial base policy, said the department's position -- first announced in February 2011 -- had not factored in the additional budget cuts known as sequestration.

"If sequestration is not averted, we would have to go back and re-examine everything, including fundamental strategic tenets," Lambert told Reuters.

The department's current policy does not forbid mergers among big weapons makers, but says the government is "comfortable" that the current number of prime contractors in the sector would ensure continued competition.

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