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| July 8, 1999 |
| July 8, 1999 |
Defense Mergers At All-Time High
Chris Hellman, Senior Analyst, chellman@cdi.org
While the U.S. government has blocked three major defense contractor mergers in the past twelve months, 1999 is already setting records for announced and completed mergers in the defense and aerospace industry. According to the semi-annual review by the trade journal "Defense Mergers and Acquisitions" (DM&A) published this week, nearly $60 billion worth of deals have been announced or completed during the first half of this year. This tops the old record for an entire year of $49 billion set in 1997.
Some industry analysts had wondered what the effect would be on defense corporation mergers of the the government's decision to block the proposed mergers of Lockheed Martin and Northrop Grumman, General Dynamics and Newport News Shipbuilding, and most recently, Litton Industries and Newport News. The DM&A report shows that while mergers among major U.S. defense contractors may have ground to a halt, mergers by subcontractors and "second-tier" corporations, along with international mergers, have continued to boom.
The flurry of mergers that occurred over the last five years are due in large part to the Pentagon. In 1993, then Deputy Defense Secretary William Perry told defense corporation executives that declining defense budgets would likely drive many of them out of business if they didn't join forces with competitors. The effect was immediate and dramatic. The total value of defense mergers in 1992 was about $2.5 billion. The following year the figure was $6 billion, rising annually to a peak in 1997.
In many ways, the current trend comes as no surprise. While the top three U.S. defense contractors -- Lockheed Martin, Boeing, and Raytheon, which together accounted for 25% of all defense contracts in 1998 -- are all the result of major mergers, consolidation among smaller companies and subcontractors has been less rapid. Similarly, foreign corporations were slower to react to the global downturn in military budgets and the possible economic effects of U.S. industry consolidation.
In discussing the Pentagon's opposition to the proposed Lockheed Martin-Northrop Grumman merger last July, DoD acquisition chief Jacques Gansler indicated that major mergers would receive closer scrutiny while consolidation by smaller companies would still be encouraged. Particularly among major subcontractors, he said, "in some areas [the defense industry] could still have significant consolidation."
In recent years European defense contractors, notably French, German and British, have also been trying to encourage industry consolidation. They see this as a necessary step not only to reduce surplus capacity, but also to promote greater regional economic integration while addressing concerns about how well European corporations will be able to compete with their increasingly monolithic U.S. counterparts. For example, the European Union threatened a trade war with the United States over the 1997 merger of Boeing and McDonnell-Douglas, which it felt would create an unfair advantage in competition for civilian aircraft contracts between Boeing and the European aircraft consortium Airbus Industrie.
There had even been discussions about creating a pan-European defense company. This idea suffered a major setback earlier this year, however, when British Aerospace (BAe) announced plans to acquire Marconi Electric Systems, a subsidiary of the British firm General Electric Corp., PLC. The $13 billion dollar deal would make BAe-Marconi the world's third largest defense contractor behind Boeing and Lockheed Martin. It also raised questions in Europe about whether the British defense industry will attempt to "go it alone" in international competition.
For more information on recent proposed U.S. defense industry mergers,
visit CDI's "Corporate Mergers" website.
Also, see DM&A's website.
The Gender Gap Hits Military Defense
Colonel Dan Smith, USA (Ret.), Chief of Research, dsmith@cdi.org
This item about women and the military for once does not revolve around unit cohesion, mixed gender training, or violations of the Uniform Code of Military Justice.
But the implications of widely reported statements from the Chairman of the Senate Appropriations Committee may be more explosive than any of these issues.
At a meeting with reporters on July 1, 1999, Senator Ted Stevens (R-AK) said that defense needs could be more easily met if support for the military among women was stronger. Senator Stevens believes that women favor more expenditures for "touch feely things" than for national defense and this gender gap adversely affects the nation's defense posture and capabilities.
Specifically, Stevens reportedly blames the lack of support from women as the reason the U.S. does not have in place a national missile defense. He also called for women to "wake up" to the fact that if war comes it will be their sons and daughters who will be at greater risk if the nation does not have a strong and capable defense.
Many may see the Senator's reported remarks as merely reflecting publicly available polling data about priorities held by Americans in varying demographic categories. Fair enough. But there is also a very disturbing undercurrent in the Senator's remarks: the implication that American women don't understand what is important to the continued growth and prosperity of the nation.
Without question, military affairs had to be the priority of the nation as we stared across the bristling landscape of the Cold War. The problem is that we also developed a myopic mind set during those forty-five years that has been carried over into the 1990s and threatens to be extended into the 21st century. This mind set equates military strength with national security while it downplays every other fundamental aspect of national strength. Proof if this lies in data equally as solid as that which supports Senator Steven's observations. One need only look at how American youths stack up against foreign students in math and science, the mortality rates of those under five years old, health care for older and younger Americans, and other measures.
There is no question that even in the post-Cold War world the U.S. must retain strong military forces to defend our territory, assist our allies when necessary, and contribute to the increased need to support U.N. peacekeeping and peace enforcement missions and other preventive missions. To maintain this posture, the Pentagon recruits young men and women and trains them to fight. By the time basic training is completed, American youths (and their mothers and fathers) who have entered the military understand that they have volunteered for a potentially dangerous profession. If war comes, they could be at risk. But compared with police and fire fighters, whose daily exposure to dangers seems to elicit little concern from many elected officials, American sons and daughters in the military are much less likely to be placed "in harm's way."
Congress gives the Pentagon a quarter of a trillion dollars annually to "maintain a navy and raise an army" (and now an air force) but is reluctant to actually use this finely tuned, technologically dominant military force. Congress is equally reluctant to support "touch feely" programs such as funding for international monetary organizations that help distressed nations, the Expanded Threat Reduction Initiative, and others that can mitigate situations before they reach the point at which military intervention is the best available option.
National security depends equally on strong social, economic, political, and military components and a healthy environment. Perhaps the real gender gap is that men like Senator Stevens don't understand what is important to the continued growth and prosperity of the nation.
Full Code of Conduct Introduced in House
by Rachel Stohl, Research Analyst, rstohl@cdi.org
The annual introduction of the Arms Transfer Code of Conduct occurred on June 17, 1999 when House Resolution (H.R.) 2269 was introduced by Representative Cynthia McKinney (D-GA). This years version of the Code enjoys bi-partisan support, as evidenced by the Resolution's 65 co-sponsors. H.R. 2269 closely mirrors the resolution introduced by Representative McKinney last year.
Known as the "Code of Conduct on Arms Transfers Act of 1999," the Resolution specifies conditions countries have to meet to be eligible to receive U.S. military assistance and arms. Military assistance and arms transfers as defined in the resolution include assistance relating to international military education and training (as defined by the Foreign Assistance Act of 1961), as well as the transfer of excess defense articles, and the transfer of defense articles, defense services, or design and construction services under the Arms Export Control Act.
As in previous years, the Code of Conduct would prohibit military assistance and arms transfers to countries that do no promote democracy, do not respect human rights, are engaged in acts of armed aggression, and do not fully participate in the UN Register of Conventional Arms. The resolution allows presidential exemptions based on either a U.S. national security interest or a determination that an emergency exists requiring the United States to transfer arms or provide military assistance. To that end, the Administration would be required to compile annually a list of countries not meeting these requirements for military assistance and arms transfers and make the list available to Congress and the international community.
Further H.R. 2269 also requires the President to promote an international arms transfer control regime by notifying the governments participating in the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual Use Goods and Technologies if countries are ineligible to receive U.S. arms and military assistance. In addition, the President is required to "request that the countries so notified also declare the listed countries as ineligible for arm sales and military assistance." To further encourage responsible arms export practices, H.R. 2269 states that the "President shall continue and expand efforts through the United Nations and other international fora, such as the Wassenaar Arrangement, to limit arms transfers worldwide, particularly transfers to countries that do not meet the criteria established [in the resolution], for the purpose of establishing a permanent multilateral regime to govern the transfer of conventional arms."
Finally, H.R. 2269 requires the President to annually report to Congress "efforts he has undertaken during the preceding year to gain international acceptance of the principles contained [in the resolution], and [evaluates] the progress made toward establishing a multilateral regime to control the transfer of conventional arms."
Earlier this year, a partial version of the Code was introduced to the House Floor as H.R. 1211 as the International Arms Sales Code of Conduct in the chairman's mark of the State Department Authorization bill for FY 2000, as part of a compromise between Representative Sam Gedjenson (D-CT) and Representative McKinney. The "Gedjenson Code" was also introduced on the Security Assistance Act in the House, and was passed by the full house. Currently, H.R. 1211 is being revised by Committee Chairman Benjamin Gilman (R-NY), and it is anticipated that it will go to the house floor later this summer as part of the Foreign Relations Authorization. On the Senate Side, Senator Patrick Leahy (D-VT) introduced the "Gedjenson Code" language on the Senate Foreign Operations Appropriations Act (S. 1234), which passed on a voice vote, but was unable to get the full Code passed in the Senate.
For more information on the Code of Conduct, see previous issues of the Weekly Defense Monitor including the following:
Africa Peace Deals Reached -- Peace Agreements were reached in both Sierra Leone and Congo this week. The eight-year conflict in Sierra Leone has claimed 50,000 lives, left approximately100,000 victims mutilated, and caused at least half of the country's four million people to flee, generating over 500,000 refugees. Congo's 11 month conflict has involved six other African countries interested in either supporting or toppling Congolese President Laurent Kabila. The fighting has claimed thousands of lives and forced hundreds of thousands to flee their homes.
Russian Arms To Syria Causes U.S. Concern -- Upon completing a two-day trip to Moscow, in which he met with Russian President Boris Yeltsin, Syrian President Hafez Assad hinted at Syria's possible purchase of Russian Su-27 fighter jets, T-80 tanks, and antitank and antiaircraft weapons. News of a possible deal concerned the United States, which considers Syria a sponsor of terrorism. In response, the State Department warned that $50 million in U.S. aid to Russia could be canceled if such weapons deals are completed.
More Tomahawks for the Navy -- Raytheon Co. has won a $414 million cotract to upgrade 624 older Tomahawk cruise missiles already in the Navy's inventory to the latest Block III type which uses a GPS satellite guidance system. The missiles would replace those used in Iraq last December and in Kosovo. The upgraded missiles will be delivered by October, 2002. Meanwhile, U.S. Representatives Jim Hansen (R-UT) and Duncan Hunter (R-CA) are pushing the Navy to restart production of Block III missiles. The Navy halted production of the Block III in favor of the Tactical Cruise missile, which is now scheduled to enter service in 2002, preferring to upgrade older Tomahawks to meet immediate operational needs.
Jammers Stripped From Carriers -- Because of the shortage of radar jamming aircraft in the U.S. military inventory, Navy EA-6B "Prowler" aircraft are being taken from their carrier air wings to perform missions on their own. Due to the heightened tensions between North and South Korea, EA-6Bs from the carrier U.S.S. Constellation were deployed to Japan, leaving the carrier without jamming aircraft. The U.S. military has been experiencing increasing shortages in its airborne jamming capability since the Air Force decided in 1991 to retire its fleet of jamming aircraft, leaving the Navy to provide jamming support for all the services.
This week on America's Defense Monitor: "Water, Land, People, and
Conflict."
Even as the conflict unfolds in Yugoslavia, there is growing evidence that the greatest threats facing any nation's security are not military threats or the deprivation of human rights, but complex environmental issues related to population growth, over fishing, water and arable land scarcity, pollution, and the economic instability that results when regions are devastated by conflict over shrinking resources. As the world's greatest consumer, is America prepared to cope with the coming competition for basic natural resources?
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