Keeping the U.S. defense and aerospace sector strong
The rules of modern warfare are changing. The folks who still believe victory goes to the side that “gets there the firstest with the mostest” need to step aside in favor of the strategists who realize it’s new technologies, applied appropriately, that will provide the margin of victory. This isn’t a radical idea. History is replete with examples of new technologies producing lasting strategic changes. That’s happening now as cyberspace becomes not just a potential future battlefield but the place where global weapons systems live.
It’s important to realize these changes will cause what economists like to call “creative disruption.” It’s true some defense sector jobs will be eliminated, but it probably is also true many more times what’s been lost will be created. Companies will arise that haven’t been players in the defense space while existing giants will consolidate in order to produce economies of scale and other cost savings that can be passed along to the taxpayers or redirected into research and development.
The recently announced merger of Raytheon Corp. (famous for the Patriot missile that helped win the Gulf War) and United Technologies is one example of that which is already underway. Together the new company should provide a surplus of innovation and domestic manufacturing and design jobs. The marriage of synergies between the two parts will produce a whole able to attract more engineers and innovators while keeping costs low and improving the timeline for taking a product from concept to development. It should also produce an impressive return for its shareholders.
Importantly, the Pentagon has made it clear it likes the deal. Undersecretary of Defense for Acquisition and Sustainment Ellen Lord said the combination of the two companies raised “no major concerns.” The administration is still in the process of looking for issues that might be problematic but, as of now, the key takeaway is that an objection is unlikely.
Wall Street should look upon that favorably. Even vocal activist investors at firms like Pershing Square Holdings and Third Point have recently backed down in their criticism of the deal. Still, they remain a problem.
Activist investors made more than 600 demands of public companies in both 2015 and 2016, and as of early 2017, they controlled more than $180 billion in shareholder value while savaging the
companies they control. Their efforts are detrimental economically. They produce big cuts to R&D, reductions in the workforce and hinder a company’s ability to survive in the long-term. A recent study of activist hedge fund performance by the Institute for the Governance of Private and Public Organizations found that after a median holding period of 423 days employee headcount was reduced by an average of 12 percent while R&D was cut by more than half.
It’s not as though they’re visionary business leaders like the so-called corporate raiders of the 1980s who brought stodgy managers leading ossified corporations to their knees to improve shareholder value. Pershing Square Holdings ended 2018 with $6.82 billion in assets under management, a decline from $18.29 billion five years ago at the end of 2014. Dan Loeb’s Third Point hedge fund lost about 11 percent in 2018 due to high-profile battles with companies like Campbell Soup Co.
It needs to be said reductions in R&D in the defense sector are not a step forward. The Russians and Chinese continue to improve their defense capabilities and weapons systems. Today’s increasing geopolitical tensions have created a major challenge the private sector is going to have to help the nation meet. China has emerged as a global science and technology leader, with strong funding in R&D. From 2000 to 2016, China’s share of global R&D rose from 4.9 percent to 25.1 percent. In 2017, Russia became the second-largest arms producer, developing among other innovations a hypersonic missile that will be likely ready for combat as early as 2020 against which the United States currently cannot defend.
This Raytheon-United Technologies merger, which on an objective basis seems to be the most natural of things, is essential to America’s effort to retain or in some cases regain a competitive military edge against our most likely potential foes. It’s part of the way to reverse the continuing relative decline in U.S. commercial innovation that has a negative impact on defense innovation and capabilities. It’s essential to future American competitiveness, particularly in the defense sector. There are only upsides to the technological innovations, economies of scale and manufacturing advancements the Raytheon and United Technologies merger will bring to shareholders, our national security and the global marketplace. The anti-trust concerns being raised by profit-takers are misguided and should be ignored.