Keep­ing the U.S. de­fense and aerospace sec­tor strong

The Washington Times Weekly - - Editorials -

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.