An empirical analysis of the patterns in defense industry consolidation and their subsequent impact

Abstract

The defense industry has witnessed significant consolidation since the end of the Cold War. This paper explores the causes of the wave of defense mergers, as well as their impact. The analysis finds that the frequency of defense mergers is more strongly correlated with overall merger activity in the economy than with DoD outlays. In examining SAR cost data on weapons systems, only 54-64% of the weapons systems' costs were affected following consolidation activity by the primary contractor that made them, of which 39-43% of the systems experienced a statistically significant decrease in their costs, and 14-21% experienced a statistically significant increase. Despite a 2/3 reduction in the number of prime contractors in the fixed wing aircraft sector between 1990 and 1998, about 43% of the systems experienced a statistically significantly lower cost estimate. For the tactical missile category, in which the number of prime contractors also fell by 2/3, 14.3% of the systems indicated statistically significantly higher post-merger estimates and 28.6% of them indicated statistically significantly lower post-merger estimates. Boeing, Lockheed, and Raytheon were among the few main primary contractors in several sectors following the consolidation wave. About 60% of the weapons systems examined in this analysis which were produced by them indicated a statistically significant change in their cost estimates. For Boeing and Lockheed, 50% of the systems exhibited a statistically significant reduction in cost estimates, while, for Raytheon, 40% of the systems experienced a significant cost increase. About 2/3 of the systems made by Lockheed and Martin Marietta manifested significant cost declines following the Lockheed-Martin Marietta merger, and about 1/2 of the systems made by Boeing and McDonnell Douglas experienced a statistically significant decline in cost estimates following the merger. This suggests that, although market concentration levels may have increased in certain sectors, DoD's costs often tended to be lower in the post-merger period for certain weapons systems.