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Project on Government Oversight

POGO opposes the proposed joint venture between Boeing and Lockheed Martin to form the United Launch Alliance

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March 16, 2006

Kenneth J. Krieg
Under Secretary of Defense
Acquisition, Technology and Logistics
3010 Defense Pentagon
Washington, D.C. 20301-3010

Re: United Launch Alliance

Dear Mr. Krieg:

The Project On Government Oversight (“POGO”) opposes the proposed joint venture between Boeing and Lockheed Martin to form the United Launch Alliance (“ULA”). POGO believes that the joint venture will reduce competition, repress innovation, create a space launch monopoly, and set a dangerous legal precedent that will likely cost taxpayers. We believe that the practice of allowing so many Department of Defense (“DoD”) mergers is a clear example of the Pentagon’s acquiescence to the defense industry’s interests – a practice that is counter to the interests of the American public. Founded in 1981, POGO is an independent nonprofit that investigates and exposes corruption and other misconduct in order to achieve a more accountable federal government.

POGO has always been a supporter of a strong national defense. Our organization has a long history, however, of opposing mergers in the defense industry. Such mergers, in most cases, reduce competition, increase the cost of goods and services, and tie the government’s hands when it may want to suspend, debar, or otherwise hold a contractor accountable.

I. United Launch Alliance

The DoD and the Federal Trade Commission (“FTC”) are in the midst of deciding whether the ULA, a proposed merger between Boeing’s and Lockheed Martin’s government satellite launch businesses, is in the best interest of the country. Initial government reports of the ULA have been very positive, treating the joint venture almost as if it is an accomplishment. Both of these entities currently receive hundreds of millions of dollars each year in government subsidies through the Air Force’s $32 billion Evolved Expendable Launch Vehicle (“EELV”) program. The high costs of the merger to taxpayers, to the economy, and to the EELV program require that the government not approve the deal.

Like many government programs, the EELV program began with the intention of incorporating commercial-like practices in the buying system. In this case, it was understood that the contractors would invest some of their own money in these businesses because the potential for substantial profits which stood to be made by launching commercial satellites using the same rockets. After providing Boeing and Lockheed over $500 million each to help defray their research and devolvement costs, the Air Force awarded each more than a billion dollars in launch contracts. However, as frequently happens with government procurements, both contractors underbid the costs of their launches. As they began losing money, they turned to the government to bail them out, seeking and securing hundreds of millions of dollars in government assistance.

History has proven that when private markets are permitted to operate without government intervention or control, they generally produce more and better products at lower prices for all Americans. In the case of the EELV, however, not only is the government providing huge subsidies, but the Air Force decided in 2005 that, due to Boeing’s theft of Lockheed’s rocket cost data and the shrinking share of the U.S. commercial space launch market, it could no longer achieve even “minimal competition.”[1] So today, instead of competing the launches based on price, the Air Force has chosen to allocate them on a sole-source basis. “The allocation process for Buy 3 is designed to keep both rocket families busy through the end of the decade, [Air Force Lt. Gen. Brian Arnold] said. ‘That will allow [Boeing and Lockheed] to be mature by that time, because they will have launched a certain number of each family of vehicle,’ he said. ‘Then we’ll have open competition after that.’”[2]

Despite the huge subsidies, guaranteed revenue, and record-breaking profits, the contractors continue to threaten to pull out of the business if the proposed merger is blocked. The government need not surrender to those threats; indeed, there are more attractive alternatives, many of which have been brought to DoD’s attention.

One, the merger could be blocked solely on the basis of avoiding establishing a precedent for “merger-to-monopoly” in all other DoD programs. The proposed joint venture could cause other potential large and small launch services and launch vehicle contractors to shy away from the government and commercial market. There are many instances when consolidation has gone too far and has adversely affected competition in the industry.

Two, the DOD could structure procurement outcomes that encourage sustained competition that are not “winner-take-all” outcomes. For example, DoD could have contracts with a 60 percent leader, 40 percent follower arrangement, or 40 percent for two successful bidders with 20 percent more for the more competitive contractor later. History demonstrates that there is no better tool for keeping prices down than competition. If one of the firms ultimately decides to get out of the business, as is the case in a market economy, other firms can acquire the equipment and personnel that will improve the quality of their operations.

Three, the merger could be allowed to proceed, but only if the firms agree to give up their subsidies and compete on a level playing field with other companies. Under the proposed merger and current EELV acquisition strategy, the ULA could unfairly benefit from the competitive advantage of hundreds of millions of dollars in annual government subsidies, which harms competition in both the government and commercial markets by allowing the ULA to sell rockets at less than their total cost. In order for competition to exist on a level playing field, the subsidy contracts should be eliminated as a precondition to the merger.

Critically, if the DoD and FTC approve the proposed merger without changing the acquisition strategy, they will eliminate competition at least through the end of the decade, ensure huge subsidies at the expense of taxpayers, and stifle innovation in the space transportation market. Moreover, the federal government has no other vendor to turn to if the product is faulty, behind schedule, or far over budget – a recipe for disaster in the commercial marketplace.

II. Defense Mergers in the 1990s

POGO’s opposition to DoD mergers is not new. In June 1996, POGO stated concerns about a new policy to pay for defense industry mergers, arguing that the government should not be paying “restructuring” costs that include merger costs and executive compensation.[3] The Government Accountability Office (then known as the General Accounting Office) stated that the Defense Contract Audit Agency had estimated that DoD “reimbursed” five contractors for “restructuring activities” to the tune of “about $179 million.”[4] The Clinton Administration’s policy subsidizing defense industry mergers contributed to $40 billion worth of mergers in 1996. In Congress the policy was known more bluntly as “Payoffs for Layoffs.”

In 1997, POGO expressed concerns with the high costs of the merger between Boeing and McDonnell Douglas, stating: “The high costs of the merger - to taxpayers, to the economy, and even to Boeing itself - mean that the Administration should not approve the deal. After years of corporate takeovers and concentration in the defense industry, this is a merger too far.”[5]
In the subsequent years POGO has voiced additional concerns about defense mergers and it has witnessed the harmful results of the federal government’s bailout of the defense industry. For example, the government has fewer contractors from which it can buy goods and services, company profits have soared, executive compensation escalated, contractor employees are out of work, and the usual suspects receive new government contracts despite rap sheets that call into question their commitment to being “responsible contractors.”[6]

Additionally, mergers have squeezed out small businesses, as they only have one or two giant monopolistic primes left to whom to sell their parts. The government itself will soon have only one or two giants from which to buy, thus reducing the government’s ability to turn elsewhere when a company does not perform adequately and responsibly.

What has happened to the trust-busting days of Teddy Roosevelt? At the turn of the last Century, the nation realized the costs of monopoly, and that more competition improved the functioning of our economy. As we enter a new Century, we seem to have forgotten some of these hard-learned lessons about the strengths, weaknesses, and management of our capitalist system. Dazzled by the seductiveness of mergers in the 1990s, we have ignored the actual costs of the merger frenzy, specifically the costs associated with reduced competition and innovation in the defense industry.

Moreover, if this merger proceeds, it is likely to hit the public with a heavy bill. DoD’s controversial policy of paying corporations for “restructuring” costs after mergers means taxpayers fork over a huge sum. Therefore, POGO calls for the government to oppose the proposed joint venture between Boeing and Lockheed Martin to form the United Launch Alliance.

Sincerely,

Danielle Brian
Executive Director

cc: Senate Armed Services Committee
House Armed Services Committee
Senate Judiciary Committee
House Judiciary Committee
Senator John McCain
Mr. Michael W. Wynne, Secretary of the Air Force
Ms. Deborah Platt Majoras, Federal Trade Commission
Ms. Pamela Jones Harbour, Federal Trade Commission
Mr. Jon Leibowitz, Federal Trade Commission
Mr. William E. Kovacic, Federal Trade Commission
Mr. J. Thomas Rosch, Federal Trade Commission
Thomas O. Barnett, Assistant Attorney General for Antitrust

_________
Footnotes

1. Lockheed Martin has agreed to suspend, and if the merger is approved, dismiss, its pending lawsuit against Boeing for alleged antitrust and racketeering violations related to previous EELV competitons.

2. Jason Bates, Space News, “EELV Launches Dished Evenly to Boeing and Lockheed,” April 11, 2005.

3. Restructuring costs include the disposal or modification of facilities, consolidation of operations and systems, relocation of workers and equipment, and workforce reductions. See also GAO Report, Defense Restructuring Costs, GAO-NSIAD-97-97, April 1997.

4. GAO Report, “Defense Restructuring Costs”, GAO-NSIAD-97-97, April 1997.

5. See POGO's editorial on a Boeing McDonnell Douglas merger.

6. See FAR Part 9 et seq.

 

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