Merging Aerojet with L3Harris preserves competition in rocket motors.

When sixth-ranked U.S. defense contractor L3Harris disclosed plans late last year to merge with Aerojet Rocketdyne
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, it seemed like an ideal solution to a pressing challenge faced by the Pentagon.

As the defense industry consolidated in the years after the Cold War ended, much of the flexibility in the supply chain for military systems disappeared.

Where once there were half a dozen producers of items like fighter jets, warships and armored vehicles, only two or three survived. In many cases, the number of suppliers providing vital inputs to finished products necked down to sole sources, or as analysts sometimes put it, “single points of failure.”

Large solid rocket motors, or SRMs, were no exception. Such motors rely on stable solid fuel rather than more volatile liquids for propulsion, so they are safe to store for years in submarines, missile silos and other confined spaces.

Without large SRMs, two-thirds of the nation’s “triad” of nuclear weapons would not be feasible to sustain, and boosting heavy military satellites into high orbits would be a challenge. Also, NASA would not be headed back to the Moon.

However, the defense department’s options for securing large SRMs were severely narrowed by sector consolidation. For example, independent producers Morton and Thiokol were absorbed into a company called Orbital ATK, and then the rocket-motor business of Orbital was acquired by missile maker Northrop Grumman
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.

Meanwhile, the rocket motor business of Pratt & Whitney, called Rocketdyne, was combined with longtime industry leader Aerojet to form a new enterprise called Aerojet Rocketdyne (Aerojet Rocketdyne contributes to my think tank).

There are now only two domestic producers of large solid rocket motors, and one of them—Northrop Grumman—is conflicted by its strategy of competing in the missile business using the rocket motors it produces.

Despite a behavioral remedy that the Federal Trade Commission insisted on when it allowed Northrop’s 2018 merger with Orbital to go forward, any company competing against Northrop in the missile business has to worry about competition-sensitive information leaking to its rival when it buys rocket motors from the company.

In retrospect, the FTC probably should have blocked the merger. But it occurred under a different administration with different standards for applying antitrust law.

This situation might be sustainable if Northrop and Aerojet had similar shares of the large SRM market, but that is not how things have played out. Northrop Grumman has gradually eclipsed Aerojet Rocketdyne by becoming the sole supplier of large SRMs for most military and civil programs.

In fact, Aerojet’s biggest opportunity going forward in the large SRM segment of the market is to supply motors for one stage of the military’s next-generation ICBM—an opportunity that wouldn’t exist had system integrator Northrop Grumman not invited Aerojet to join its ICBM team.

So, to put it succinctly, Northrop Grumman dominates the domestic market for large solid rocket motors. It is anybody’s guess whether Aerojet can hang on indefinitely with a narrow slice of the market, or whether Northrop Grumman will end up owning a monopoly.

Against that backdrop, the L3Harris bid to merge with Aerojet is a godsend for a Pentagon seeking to preserve competition in large SRMs. L3Harris is basically an electronics company with no role in building missiles or space boosters. Thus, absorbing Aerojet would raise no antitrust issues, either horizontally or vertically, in the industry’s structure.

Nor is there a question of scale. Aerojet is so small that L3Harris would remain the number-six ranked Pentagon contractor. There would be no change in how many missile providers or large SRM suppliers the Pentagon could choose from.

Furthermore, L3Harris has a long history of supporting other military contractors as a merchant supplier, meaning a neutral party that does not try to leverage its market position to play favorites. So when CEO Chris Kubasik pledges to remain a merchant supplier of large SRMs, there is good reason to believe he is being truthful.

The resulting combination would create an enterprise that is big enough to invest and innovate in rocket motors, without presenting any threat to the current competitive landscape. If such a threat exists, it comes from Northrop because of the inherent tension between its role as motor provider and missile maker.

Allowing L3Harris to merge with Aerojet is the best available solution to preserve competition in the marketplace. Without the resources provided by L3Harris, Aerojet Rocketdyne would be hard-pressed to keep up with the challenge posed by Northrop’s rocket-motor business.

Aerojet has a long and distinguished history in the business, including many technological firsts, but it only has about $2 billion in annual sales and its employs a fraction of the personnel that Northrop does in rocket motor development and production.

The Federal Trade Commission effectively foreclosed the purchase of Aerojet by another aerospace company when it moved to block a bid by Lockheed Martin
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. It thus finds itself in the anomalous position of having allowed the creation of a dominant player (Northrop-Orbital) in 2018 while now subjecting a lesser player to more demanding standards.

L3Harris is one of the few suitors that understands the defense business while still passing muster as no threat to competition. Quite the opposite: it is incentivized to modernize Aerojet so that it can compete successfully with its rival.

Aerojet management clearly has decided that it needs a partner to thrive in the future. Its approach to L3Harris was predicated on the assumption that the partner should be in the defense business but raise no antitrust concerns.

The only plausible alternative to L3Harris would be a private-equity owner, and that is unlikely to lead to a congenial outcome for those who favor competition in the large SRM market. Private equity generally is interested in generating cash, not investing for the long term.

Aerojet Rocketdyne is a modest contributor to my think tank.