WASHINGTON — As regulators begin to look into Lockheed Martin's plan to acquire helicopter manufacturer Sikorsky, Pentagon officials are focused on identifying potential reverberations down to the lowest level of tiered suppliers, as well as sorting out potential issues of competitiveness.

Speaking on background due to the nature of regulatory inspections, a senior defense official said the goal is to leave "no stone unturned" while looking at the proposed acquisition.

That includes paying attention not just to the big picture issues of the world's largest defense company buying a major player in the global military rotorcraft market. It also involves looking at what happens much farther down the supply chain.

"This is not just a helicopter business. There are electronic components and subsectors underneath the traditional vertical lift, so we are looking at the subsectors," the official explained.

"Is there healthy competition there? Will this be further vertical integration on any particular subsector?," the official said. "So we're looking at all the sectors and all the suppliers we have visibility into from a fragility and criticality standpoint. We're looking at the lowest tiers to ensure that we maintain a healthy industrial base."

Competition, both vertical and horizontal, is also a key aspect of the deal being weighed by regulators.

There has been speculation that the Lockheed and Sikorsky deal could create issues of vertical integration, given Lockheed's role as a major producer of helicopter electronics.

"We are always concerned about vertical integration, where it could put significant pressure on competition," the official said. "That is a question. Absolutely."

Information Exchange

To help answer those questions, regulators will be in close contact with both Lockheed and Sikorsky — communication which has is already underway begun.

Lockheed Martin CEO Marillyn Hewson called Frank Kendall, the Pentagon's top acquisition official, the night before the deal was announced, said the DoD official. That started the process of organizing for regulators.

The Department of the Treasury and Federal Trade Commission will both each have a say in the process, with the three departments expected to sort out who will be the lead agency "in the next few days," the official said, before adding that the discussions between the three offices has been very smooth so far.

"Because of its visibility and its size, it has risen to a high enough level to get senior engagement early," the official noted. "And anytime you can get senior engagement early you usually have better outcomes."

After a lead is decided on, all three teams will dig into the deal to determine where any potential roadblocks may be.

How long the process takes, however, is unclear. The official noted that each acquisition review has its own challenges and issues to be worked out, and take, essentially, as long as they take.

At the same time, everyone involved is pushing to get this done as quickly as possible, the official said, adding that long audits can become costly for both the government and industry.

To help speed the process along, DoD is tapping its knowledge base, both inside and outside the building.

"We've pulled out all stops," the official said. "We brought in anyone who was familiar with complex M&A activity, whether they worked on the [Northrop Grumman and Ingalls shipbuilding] spinoff or something more recent."

"We have experts in vertical lift," the official continued. "There are experts in engines, electronic, component parts, metals — we're looking across the sector at anything Sikorsky has built, builds or [could be] part of their offering, and quite frankly, Lockheed as well."

More M&A Coming?

The $9 billion acquisition is the largest to hit the defense industry in some time, and has been seen as a potential harbinger of more mergers and acqusisition activity to come.

Asked if the Pentagon expects to see assets shifting in the defense industry in the near future, the official said "there is nothing" indicating a major overhaul of top tier firms on the horizon.

But, he said, "we do recognize that there is a lot more activity of companies rebalancing their portfolios, as they should. With budget uncertainty companies are making their decisions on the survival of the company."

Lockheed is taking part in that rebalance not just with its Sikorsky procurement, but by shedding its IT and technical services business. That follows a recent trend, with BAE Systems exploring options for shedding its services business in its US Intelligence and Security Unit, as well as the splitting off of SAIS/Leidos and Engility/L-3.

Given the focus on M&A activity, the official said, keeping in contact with industry is important for the Pentagon.

"We see a lot of movement, but it doesn't always materialize," the official noted. "Sometimes companies test the water to see what's out there for them. We have a close eye on it, and we do meet with a lot of companies over the year."

Email: amehta@defensenews.com

Twitter: @AaronMehta

About Aaron Mehta

Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.

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