Defense Industry Consolidation

The pace of consolidation of the U.S. defense industry has increased sharply this year. In the 16 months between August 1992 and December 1993, the industry experienced four large mergers and acquisitions; but since the start of this year, the industry has already seen five major combination of firms. This dramatic reshaping of the industry involves extraordinarily complex transactions with potentially significant cost, benefit, and risk implications for corporate bottom lines, taxpayer expenditures, and national security capabilities. In July 1993, the Pentagon issued a memorandum allowing restructuring costs to be charged against defense contracts when it could be shown that savings to the government as a result of the restructuring would exceed the costs or when the merger preserved a critical defense capability. This testimony focuses on (1) the definition of restructuring costs, (2) the costs impact on Defense Department contracts, and (3) other issues.