Defense Megacorporations and the Domestic Power Equation
Merger mania is leading to a concentration of power in the defense industry that would make President Eisenhower recoil. Boeing is going to swallow McDonnell Douglas, with government approval. Lockheed Martin and Northrop Grumman, each the product of previous consolidations, have agreed to merge. Raytheon will combine with Hughes Aircraft in the fall. At the end of the Cold War, 20 major contractors were selling weapons systems to the Pentagon. A few years later, a dozen. And then there were three, plus a couple of strays like General Dynamics. In his farewell address, Eisenhower warned, "... we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist." It has persisted for more than 35 years as the Pentagon, the defense industry, and Congress joined to form and build a new institution. Now its power is about to increase.The enhanced Boeing and the enhanced Lockheed will each have more than 200,000 employees and about $40 billion in annual sales. These two megacorporations will enjoy the lion's share of purchase orders for military aircraft and electronics, missiles and space vehicles from the Pentagon and NASA. Raytheon will bring up the rear. With fewer fish and a slightly smaller pond, competition must decline. That will likely translate into higher prices for weapons, rather than the savings promised by the Defense Department and the industry. The mergers will also increase pressure on Congress to buy arms. All the defense-industrial conglomerates carry with them a train of subcontractors providing components and various services that stretches across the country. These firms can be mobilized to put the heat on individual members of Congress representing their districts -- as they have many times in the past.Northrup Grumman, for example, is based in California, but has subcontractors for its B-2 bomber program in 48 states. Even North Carolina -- better known for tobacco farms and hog factories than defense plants -- had 44 companies with B-2 subcontracts over the life of the program.Indeed, one reason some members of Congress keep trying to extend the B-2 program despite Pentagon opposition is that so many jobs are tied to it. Rep. Norm Dicks, a Washington state Democrat, recently helped persuade the House to spend $331 million for purchase of B-2s. Dicks represents the interests of Boeing, the largest B-2 subcontractor, which is headquartered in Seattle.Boeing and Lockheed executives will now be able to tap the grassroots power of McDonnell Douglas and Northrop Grumman subcontractors, conveniently located wherever congressional votes are harvested. Merger mania was spurred early in the Clinton administration when then Secretary of Defense Les Aspin, flanked by William Perry and John Deutch, called in the heads of major defense companies. Pointing to a recent study showing the industry had the capacity to produce some 50 percent more than would be needed in the post-Cold War world, they urged industry leaders to act.Norman Augustine, the CEO of Martin Marietta, responded most forcefully, arranging a series of consolidations that culminated in a merger with Lockheed to form the world's biggest defense contractor. Perry and Deutch, who had business ties to Martin Marietta before coming to the Pentagon, lubricated the mergers with "restructuring payments" to offset costs. The Defense Department authorized payment of $348 million to ease the merger of Lockheed and Martin Marietta. Mergers have been a bonanza for stockholders -- Lockheed Marietta stock has almost doubled in value since the 1995 merger, and defense and aerospace firms have soared twice as high as the broad stock market in the past five years. Augustine will take millions in stock options when he retires in August.Defense workers, however, have fared less well. Some 21,000 jobs have disappeared at Lockheed Martin since its last major acquisition was completed in 1995, and other firms caught in the whirl of defense mergers have experienced similar cuts.Within a decade, the Secretary of Defense will be facing a very few behemoth weapons-makers. This new configuration of power could mean the purchase of more weapons than even the military wants. And the taxpayers will be wondering why Pentagon spending is so high.