Corporate Mega-Mergers Can Hurt Economy, Taxpayers | Opinion

While many Americans sound off on President Joe Biden's plan for the first major tax hike since 1993, including a proposal to raise corporate rates from 21 to 28 percent, few talk about how that tax increase might induce corporate mega-mergers, which could further harm the economy and taxpayers. Will more large corporations seek to combine forces? If so, will they boom or bust?

Having served for a decade on the House Ways and Means Committee, the powerful entity responsible for tax policy in Congress, I've seen costly consequences to celebrated mega-mergers in the past.

In 2001, execs at AOL and Time Warner thought merging would synergize the internet's new media and cable television's old media. AOL-Time Warner, Inc. posted a net loss of nearly $99 billion for 2002. A few years later, in 2005, Sprint merged with Nextel to combine a public consumer-driven communications network with a more industry-centric one, but it failed due to incompatible systems and management styles, ultimately resulting in a nearly $30 billion loss. Bank of America acquired Countrywide Financial Corp. for $2.5 billion, then lost over $40 billion in legal costs, settlements and real estate.

Despite the history of such colossal failures and a coming spike in corporate interest rates, there's another proposed merger on the horizon that ought to cause alarm. Not only because it spells trouble for the economy and taxpayers, but it's also a huge national security risk.

Lockheed Martin, one of America's biggest companies and the world's largest arms manufacturer with net sales of $65 billion in 2020, recently announced its planned acquisition of Aerojet Rocketdyne in a $4.4 billion deal.

Based in California with 5,000 employees, Aerojet provides propulsion technology to nearly all major U.S. defense contractors, including Lockheed Martin, Boeing, Northrop Grumman and Raytheon.

A "vertical integration" merger of Lockheed with Aerojet would force the other companies to explore missile propulsion system options outside the country. That's not only anti-competitive and monopolistic, but it runs counter to a Biden administration executive order for federal agencies to use more U.S.-based suppliers in the "Buy American" spirit.

As Lockheed and Aerojet push a merger that would considerably damage U.S. industry peers and undoubtedly cost taxpayers a lot of money, they are trying to convince Americans that they are only seeking to "boost innovation" and compete with SpaceX while enhancing our capabilities in space. In reality, this is a power play to gain unabated power over U.S. missile defense.

Lockheed Martin
The logo for Lockheed Martin Space Systems. Smith Collection/Gado/Getty Image

While it's true the United States must keep pace with advanced rivals China and Russia in missile technology, while staying far ahead of hostile powers Iran and North Korea, doing so by favoring one company at the expense of the industrial base is counterproductive.

We saw a similar merger in 2018 when Northrop Grumman acquired space contractor Orbital ATK for $7.8 billion, leaving Aerojet as the last independent solid rocket motor provider in the country. That ended up costing taxpayers a fortune because Northrop subsequently won the $80 billion contract for the Ground-Based Strategic Deterrent missile program, forcing Boeing out of the completion entirely—even though it was the incumbent and already heavily invested.

The Federal Trade Commission (FTC) subsequently launched an investigation into Northrop to determine if it acted in a "restraint of trade" and violated an order requiring the company to sell its solid rocket motor engines on a "non-discriminatory basis" to all competitors for missile contracts.

It's inevitable we would see a similar result if the Lockheed–Aerojet merger goes through as intended. Lockheed would gain full control of the critical propulsion technology on all current and future plans for Missile Defense Agency interceptors.

With bad lessons learned from the Northrop–Orbital deal in June 2020, the FTC and Justice Department issued new guidelines for evaluating such mergers, noting the "important step forward in maintaining vigorous anti-trust enforcement" and a reaffirmation of "commitment to challenge vertical mergers that are anti-competitive and would harm American consumers."

This proposed merger isn't inevitable and there is still time to put a stop to it. It must still be approved by the Defense Department and FTC. At the very least, regulatory officials must take a hard look at the overall impact on the health of America's entire industrial base and be prepared to push back on industry titans who may only see their own company's bottom line.

Unfortunately, our country has a long history of botched corporate mergers and acquisitions that hurt the economy. In this case, taxpayers will inevitably end up picking up the tab while our safety is compromised. With today's economic uncertainty, bad aerospace and defense mergers would increase anxiety and harm our security. It is time to put the American people first.

J.D. Hayworth is a former Republican U.S. representative from Arizona.

The views expressed in this article are the writer's own.