America’s protection industrial base is within the throes of main change. For the primary time in 40 years, main energy battle is an actual chance. Conflicts in Ukraine and Israel are offering a harrowing glimpse of what that battle may seem like. Know-how is evolving at a dizzying tempo. As a substitute of peacetime effectivity, governments are prioritizing wartime surge capability. The “China shock” and COVID-19 have destabilized world provide chains.
Amid these daunting realities, a brand new technology of protection expertise corporations has emerged. Anduril Industries — which was based in 2017 and which I joined in 2020 — is one of them. After all, protection expertise corporations goal to become profitable. However these corporations additionally goal to disrupt and remodel American protection by altering tradition, attracting new and higher expertise, harnessing industrial applied sciences, championing software program, bolstering competitors, reforming acquisition practices, and extra. Solely time will inform if they’re profitable. However maybe not as a lot time as one may suppose. As extra protection expertise corporations scale to compete with conventional protection primes, the contours of a brand new protection industrial base are rising.
Adjustments to this scope, velocity, and scale naturally result in questions, anxieties, and fears. To wit, these pages not too long ago carried a warning about an impending “new period of protection giants.” In keeping with this view, protection expertise corporations are partaking in company acquisitions that mirror the protection trade consolidation carried out by the standard protection primes after the top of the Chilly Conflict. This new consolidation is hurting small companies and making America’s protection industrial base much less various, resilient, and modern.
Giants are commonplace in myths. A bigger-than-life story requires a larger-than-life villain. And such is the case within the fable of America’s new protection consolidation. The reality is that the three a long time of protection trade consolidation precipitated by the so-called “Final Supper” is over. And good riddance. America and its allies want a extra various, extra modern, and extra aggressive protection industrial base that may ship a lot better manufacturing capability. Protection expertise corporations are utilizing each device at their disposal, together with acquisitions, to comprehend this imaginative and prescient, they usually’re doing so with small companies as important companions.
Constructing a brand new protection industrial base requires an correct understanding of what motivates mergers and acquisitions in protection, how protection expertise corporations are utilizing acquisitions, and the way latest acquisitions differ from the post-Chilly Conflict consolidation of conventional protection primes.
A Merger of Acquisitions and Consolidations
Concern about latest protection acquisitions typically stems from the flawed assumption that acquisitions are in themselves proof of protection trade consolidation.
In some circumstances, mergers and acquisitions can point out a development towards consolidation or a need to extend market share in instances of sectoral decline. Some protection primes are utilizing acquisitions to shore up susceptible provide chains. Acquisitions can even symbolize an try and seize development amid uncertainty, a technique typically utilized by protection corporations when authorities funding and contracts are inconsistent.
However in a much wider sense, the abundance of capital and agile capital markets, which facilitate lively mergers and acquisitions, have been — and stay — key drivers of America’s technological benefit and dynamic innovation base. On this mild, latest protection acquisitions are correctly seen as an indicator of a rising, extra dynamic, extra modern, extra productive protection sector.
After a long time of decline, world safety dangers have pushed the protection sector right into a interval of projected long-term development in america and globally. That’s driving an unprecedented infusion of personal capital into protection, together with greater than $130 billion in enterprise capital funding in simply the final 4 years. The supply of capital has helped patriotic entrepreneurs to create a whole bunch of recent protection startups.
Non-public capital has additionally helped these new corporations scale, together with by funding acquisitions. Acquisitions assist protection corporations maintain tempo with technological change, gas innovation, enhance their merchandise, and strengthen their aggressive benefit. That’s not uncommon. It means protection is changing into extra like different sectors with excessive innovation and development — akin to expertise, power, and monetary providers — which frequently function important mergers and acquisitions exercise. The expertise sector, specifically, reveals that acquisitions can and infrequently do go hand in hand with excessive charges of recent enterprise begins.
Acquisitions assist entice much more new entrants to protection, together with small companies, by sending a market sign {that a} worthwhile exit is feasible. It is a virtuous cycle of development that ought to be embraced.
Acquisitions are additionally a key part of attaining economies of scale to counteract the dangerously inadequate manufacturing capability of the protection industrial base. The Division of Protection doesn’t simply want extra corporations that innovate. It wants extra corporations that construct at scale. Acquisitions that assist extra protection expertise corporations obtain that scale are proof of the market successfully mobilizing non-public capital in response to authorities demand.
For instance, when Anduril purchased Blue Pressure Applied sciences, the protection industrial base didn’t lose an plane producer. Fairly, it gained an organization with the correct mixture of expertise, expertise, and sources to offer conventional trade a run for its cash in autonomous plane. Ultimately, Anduril achieved a milestone victory with its downselection for the Collaborative Fight Plane program, beating out Lockheed Martin, Northrop Grumman, and Boeing. This win additionally belongs to the greater than 40 small companies that at the moment are serving to to construct the YFQ-44A — the results of that program — for the U.S. Air Pressure. That’s not trade consolidation. It’s the form of trade growth that America’s protection industrial base wants proper now.
Constructing the Protection Industrial Base America Wants
Mergers and acquisitions had been widespread in protection after the Chilly Conflict, and they’re widespread at this time. However these two intervals of mergers and acquisitions are essentially completely different of their context, motivation, and aims. Most significantly, they’re producing completely different outcomes.
The mergers and acquisitions of the post-Chilly Conflict period had been explicitly geared toward attaining consolidation as a result of the federal government believed fewer bigger corporations can be “extra environment friendly at stretching restricted price range[s]” that had been solely attainable as a consequence of a uncommon and sudden discount within the standard army menace to America and its allies.
The “Final Supper” consolidation was a rational company response to decreased authorities demand. Nevertheless it additionally produced a protection industrial base ill-suited to at this time’s challenges, hampered by danger aversion, diminished capability, value overruns, schedule delays, and efficiency points. These penalties are felt at this time in Washington, Kyiv, and Taipei — and, worse, in Beijing and Moscow. Put merely, the arsenal of democracy shouldn’t be delivering functionality at ample velocity and scale.
That’s the reason at this time’s mergers and acquisitions in protection expertise goal to create extra corporations of ample dimension which are able to quick innovation and large-scale manufacturing funded by elevated protection budgets necessitated by extra extreme and complicated army threats to America and its allies.
Within the 30 years after the Chilly Conflict, america created no new protection corporations price greater than $1 billion. Then, SpaceX reached that milestone in 2010. Palantir and Anduril adopted. In the present day, there are greater than a dozen protection “unicorns.” Partly assisted by acquisitions, these corporations are attaining technological maturity and economies of scale that create a extra aggressive protection market. Because of this, the Pentagon has extra distributors to select from for its main weapons packages. Meaning it has extra leverage to incentivize higher value, schedule, and efficiency for warfighters and taxpayers.
Meet the New Acquisitions, Identical because the Outdated Acquisitions…
But for some, there’s little distinction between the “Final Supper” and the “First Breakfast.” This view was expressed most evocatively in these pages not too long ago: “[T]oday’s protection expertise corporations, whereas positioning themselves as disruptors, are following the identical consolidation playbook that created the primes they declare to problem.” This playbook allegedly goals to dominate complete market segments, replicate army doctrine and necessities, and go away small enterprise with out a seat on the desk.
Protection expertise corporations are actually utilizing acquisitions to enter new market segments. However not even the most important protection expertise corporations are wherever near capturing a market section — and positively not as the results of acquisitions. In actual fact, the market segments wherein protection expertise corporations are most lively — synthetic intelligence, autonomous methods, area, software program, and others — are a few of the most various and aggressive in all the protection sector.
Certainly, the concept that protection expertise corporations are looking for — not to mention attaining — dominance in sure market sectors belies the truth that all protection expertise corporations mixed account for lower than 1 % of protection contract awards. The highest 5 primes claimed greater than 33 % of contract award obligations in fiscal yr 2023. In the meantime, small companies declare greater than 25 % of prime contract awards, a determine that has been steadily rising for the final two a long time.
Furthermore, not one of the latest acquisitions by Anduril or different protection expertise corporations method the size of their “Final Supper” predecessors. The merger of Lockheed and Martin Marietta united what had been then the second- and third-largest American protection contractors. Even after its latest acquisitions referenced in these pages, Anduril’s present estimated valuation is simply one-quarter of Lockheed Martin’s market capitalization. Furthermore, the three acquisitions particularly talked about — Dive Applied sciences (28 staff), Copious Imaging (42 staff), and Blue Pressure Applied sciences (81 staff) — introduced a complete of 151 staff into the corporate. Including that variety of personnel each quarter of yearly henceforth, it will take Anduril practically 200 years to match Lockheed Martin’s present employment rolls. A brand new protection big, certainly.
One other supposed similarity of latest acquisitions and people of the post-Chilly Conflict interval is that army necessities — not simply budgets — are driving trade consolidation. Previously, horizontal market segmentation outlined by platforms mirrored the prevailing doctrinal distinction between domains of warfare. In the present day, the priority is that protection corporations are consolidating to reflect the combination demanded by ideas like joint all-domain command and management. As consolidation continues, the chance of vendor lock will increase as fewer corporations are able to assembly more and more subtle army necessities.
However this argument appears to contradict the primary thrust of protection acquisition coverage over the past decade. Fairly than absolutely built-in capabilities, the Pentagon has been emphasizing a modular open methods structure method, which goals to permit “plug and play” with {hardware} and software program methods from completely different distributors. An excellent instance of that is the Air Pressure’s intensive use of authorities reference architectures that allow the Air Pressure to keep up a bigger secure of potential distributors by means of commonplace interfaces and steady competitors. Certainly, avoiding vendor lock appears to be high of thoughts for Pentagon officers, even for brand new ideas like joint all-domain command and management. When then Secretary of Protection Lloyd Austin signed a technique for this idea again in 2021, protection officers acknowledged explicitly that the secretary’s course was that “the very best options will likely be carried out so long as there isn’t any vendor lock or proprietary limitation” and that joint all-domain command and management ought to be “open supply.”
Lastly, there’s a view that at this time, as within the aftermath of the Chilly Conflict, the Protection Division’s give attention to new protection giants produced by consolidation comes on the expense of small companies, leaving them with out a seat on the desk. It’s undoubtedly regarding that small enterprise participation within the protection industrial base continues its decades-long decline. However the query is: What accounts for small enterprise refraining from doing enterprise with the Pentagon?
It’s no thriller. Small companies have answered this query in a number of surveys over time: complicated and protracted procurement processes, unstable and unpredictable protection funding, lack of assist from protection prospects, danger to mental property, burdensome compliance necessities, and extra. There could also be a survey on the market wherein small companies say they’re deterred by the prospect of profitable acquisition provides they’re free to simply accept or decline. I simply haven’t seen it but.
But, that is exactly what has been alleged in these pages: The Pentagon’s immutable thirst for consolidation and the acquisitive nature of protection expertise corporations are eliminating area for small enterprise in protection. By no means thoughts that small enterprise participation within the protection industrial base was declining lengthy earlier than the emergence of protection expertise corporations. By no means thoughts that small enterprise prime contract awards dwarf that of enterprise capital-backed corporations. And by no means thoughts that between 2010 and 2023, the decline in small enterprise distributors for the Protection Division and that for the federal authorities as a complete had been an identical: 48 %. On the very least, this means that obstacles to small enterprise in federal contracting should not distinctive to the Protection Division or the protection sector.
A Joint Pressure: Protection Tech and Small Enterprise
It’s time to flip the web page on the protection trade consolidation of the final 30 years that has decreased competitors and resulted in larger prices, much less innovation, poorer efficiency, and extra susceptible provide chains. America wants a extra various and aggressive protection market that delivers improved value, schedule, and efficiency. That requires the Protection Division to create new packages of enough scale and quantity — backed by ample, well timed, and predictable funding — to supply new entrants and nonincumbents with alternatives to compete and win. And it means making a tradition of steady competitors that’s embodied in acquisition coverage. There ought to be no everlasting winners or losers — solely everlasting rivals all the time trying to the following competitors across the nook and continually investing, innovating, and enhancing.
That’s the protection industrial base wherein protection expertise corporations and small companies alike need to compete. That’s the protection industrial base they will construct collectively. Many, if not most, protection expertise corporations are small companies. And people protection tech corporations which are lucky sufficient to attain the requisite scale to compete with conventional protection primes will proceed to depend on the invaluable contributions of their small enterprise companions. Some might need to pit protection expertise corporations and small companies in opposition to one another. However that could be a dropping recreation as a result of, within the closing evaluation, protection expertise corporations and small companies need the identical factor: an opportunity to be bold, go quick, and show what they will do for America.
Dustin Walker is senior director for coverage at Anduril Industries and a nonresident fellow on the American Enterprise Institute.
Picture: Grasp Sgt. Gustavo Castillo by way of Wikimedia Commons
