The Biden administration has effectively killed any prospect that Lockheed Martin will participate in major defense mergers through mid-decade.
In January, the Federal Trade Commission voted to block a proposed merger of Lockheed with rocket-maker Aerojet; Lockheed disclosed last weekend it would not contest the agency’s action.
Only days later, the Pentagon issued a report on the state of competition in the defense industry calling for “heightened review of any further mergers.”
It doesn’t take much reflection to see what this means for America’s biggest military contractor: Lockheed Martin is out of the merger business, at least as far as defense is concerned.
The company’s future growth in defense will have to be generated organically, leveraging capabilities it already possesses or invests to create.
Having observed the company for a long time as both a consultant and think tank analyst—all the way back to before Lockheed merged with Martin Marietta—I think the government’s actions will have scant impact on the enterprise’s future prospects.
They could turn out to be a net positive by clarifying corporate options and eliminating the distractions that always arise when mergers are in process.
After all, at $2 billion in sales, Aerojet would have added only 3% to Lockheed’s top line.
There are other opportunities waiting in the wings that could bolster revenues and returns by a lot more than that.
Here are four among many future vectors that can keep Lockheed Martin ahead of its competitors without requiring messy mergers.
F-35 sustainment. Lockheed Martin is airframe integrator for the F-35 fighter, a program that will likely produce 156 high-tech tactical aircraft each year for decades to come.
The program already generates over a quarter of corporate revenues, but that could be just the beginning.
The Government Accountability Office figures that the cost of building 2,456 F-35s for three domestic military services will total $400 billion, but the cost of sustaining them—keeping them airworthy and ready—across a 50-year service life will be $1.3 trillion.
And that’s before we even get to the hundreds of F-35s to be operated by allies.
The company didn’t focus much on sustainment while the F-35 was being developed, but it still ended up understanding the fighter better than anybody else.
It has begun proposing ideas to the Joint Program Office to assume a more active role in supporting the F-35, within a framework known as “performance-based logistics.”
With F-35 poised to be the most reliable, maintainable combat aircraft in the joint fleet, Lockheed has a good shot at securing a major new military franchise—especially given the need to continuously upgrade the fighter’s technology as threats evolve.
Space resilience. Lockheed Martin is the dominant provider of national-security spacecraft to the military and intelligence communities.
It builds most of the missile-warning satellites, most of the imaging spy satellites, most of the secure communications satellites, many of the GPS satellites, and a host of other orbital systems.
But that’s just the part of the story that’s public.
The government is engaged in a vast array of secret programs aimed at making the nation’s orbital infrastructure more resilient—a goal that was reiterated late last year in the Biden administration’s space strategy.
“Resilience” in this case means protecting spacecraft, ground stations and communications links from hostile action, a task that entails such arcane measures as countering jamming attacks and hiding satellites from surveillance.
Washington will be spending billions of dollars on space resilience every year for decades to come, and Lockheed likely understands the challenges better than any other company.
So, while you may never see the details laid out in a quarterly filing, this is sure to be a big revenue generator for the company going forward.
Hypersonic defense. Lockheed Martin has won all of the big programs to provide the Air Force, Army and Navy with hypersonic weapons—systems that can maneuver within the atmosphere at five times the speed of sound, or faster.
The company has a built-in advantage because it has been modeling and testing hypersonic phenomena for decades as a result of its work on ballistic missiles.
However, building weapons that can match or surpass the performance of Chinese and Russian hypersonic missiles is just one facet of the emerging opportunity.
The larger opportunity is defending against them, which will require agile interceptors, a new space-based tracking architecture, sophisticated battle management and other features.
Lockheed will have to compete against the likes of Northrop Grumman and Raytheon to win defensive contracts, but it already leads in key areas such a fast-reacting interceptors and advanced sensors, so it is sure to get at least a slice of this pie.
Future rotorcraft. Lockheed is currently competing against Bell Textron to build two future combat helicopters for the joint force under an umbrella program designated Future Vertical Lift.
FVL, as it is often called, could ultimately generate demand for 3,000 advanced rotorcraft to replace aging land-based and sea-based helicopters, and Lockheed’s Sikorsky unit is a key player in the competitions.
It is sure to win something, and if it prevails on the biggest items, it will have secured the lion’s share of domestic rotorcraft production through mid-century.
Here too, the scale of potential revenues dwarfs what Aerojet might have delivered to the top and bottom lines.
And these four opportunities are just the biggest near-term possibilities.
Lockheed has assembled secret roadmaps for 14 technologies that step-by-step lay out how it can remain the nation’s top innovator in national security.
So, losing the bid to acquire Aerojet will have little impact on the company’s future prospects.
In fact, Lockheed now has an additional $4.5 billion from the Aerojet deal that it can pour into research to maintain its lead in the technologies critical to future warfare.
Lockheed Martin and several of its competitors contribute to my think tank.
