In May 2005, Boeing and Lockheed Martin announced plans to form the United Launch Alliance (ULA), a joint venture which combined the only two suppliers of medium-to-heavy national security related launch services to the U.S. government. With input from the US Department of Defence (DOD), the FTC cleared the transaction. The FTC’s approval rested on two assumptions: that the efficiencies claimed by the merging parties were significant, and that the DOD and the NASA would use best efforts to facilitate entry into the launch services sector.
This article, available here, examines the merger clearance decision and assesses the assumptions supporting this 2006 decision in light of subsequent experience. In short, those assumptions proved justified. ULA thus far has met the reliability expectations that guided the analysis of the DOD and the FTC. From its first days of operation through July 30 2020, ULA has made 140 launches without a failure. The venture has achieved and surpassed the reliability goals that the companies advanced in 2005–2006 as one of the key rationales for their collaboration. Further, the new suppliers of launch services (SpaceX and others) have made remarkable progress toward becoming credible alternatives for NASA, national security agencies, and commercial buyers.
Part I describes ULA’s creation and its rationale.
In May 2005, following extensive consultations with the DOD and other government customers, Boeing and Lockheed Martin announced plans to form the United Launch Alliance joint venture concerning medium-to-heavy launch services.
The parties advanced two principal rationales for the transaction. First, the consolidation would yield hundreds of millions of dollars in cost savings through the elimination of personnel redundancies and superior operational integration. These savings, in turn, would reduce the price that government purchasers paid for launch services.
The second, and more important, justification involved scale economies. Falling demand for launch services, for national security purposes and for commercial applications, had reduced production rates for both firms. This increased the risk of launch failures, which could deny the DOD needed access to critical communications and reconnaissance satellites. The companies stated that the combination of their experience in a single, integrated team would raise capability and improve performance above levels that prevailed when Boeing and Lockheed Martin maintained independent design and production teams.
Part II sketches the modern framework for antitrust analysis of aerospace and defence industry mergers.
The review of mergers involving defence contractors involves contributions from the U.S. antitrust agencies (the DOJ and the FTC) and the government purchasing agencies (e.g. DOD). The DOJ and the FTC assess the compatibility of transactions with the federal antitrust laws. The defence purchasing authorities provide their views to the antitrust agencies and determine whether the transaction satisfies government procurement requirements. The government buyers do not control the antitrust analysis, but their views carry considerable weight in decisions by the DOJ or the FTC.
Since the mid-1980s until 2005, when Boeing and Lockheed notified their agreement to the U.S. antitrust agencies, the DOJ and the FTC had reviewed numerous proposed mergers involving firms in the aerospace and defence industry. By 2005, a number of trends could be identified. The federal agencies generally challenged mergers-to-monopoly (i.e. transactions that threatened to reduce from 2 to 1 suppliers). In a few cases, the antitrust authorities had approved mergers to monopoly; these rare approvals rested heavily on recommendations from the DOD regarding the likely volume of future purchases of the system in question and the costs associated with sustaining two independent design and production teams.
The mechanics of the interaction between competition agencies and defence department was influenced by a case where a merger was challenged (and the court challenge upheld) despite some ambiguous support for the merger on the part of defence stakeholders. This inspired the creation of a Defence Science Board (DSB) advisory panel which recommended, among other steps, closer coordination between the antitrust agencies and the DOD involving proposed defence mergers. The DOD created a liaison office to work with the antitrust authorities to gather information and to present a coherent statement of the DOD’s opinion about specific transactions. The operation of this liaison mechanism improved communications between the antitrust agencies and the government purchasers, especially by engaging the two groups in data collection and substantive discussions early in the life cycle of the transaction.
Part III reviews how the FTC and the DOD evaluated the ULA joint venture proposal.
Over the course of its investigation in 2005, the FTC formed the view that the transaction was a merger to monopoly for mid-to heavy-lift national security launches. The combination of these assets in a single supplier created a strong presumption that the merger would have serious anticompetitive effects by raising the prices that government purchasers would pay over time for launches, and by depressing incentives for Boeing and Lockheed Martin to innovate in advancing the state of the art for launch vehicles.
While this ordinarily meant the merger would have been challenged, the DOD concluded that the superior reliability promised by the transaction warranted accepting the competition risks. To the DOD, the joint venture would concentrate design, production, and launch experience in a single integrated team and thereby sustain high levels of proficiency. The same conclusion was reached as regards the launch site preparation operations of the two companies; greater proficiency would generate higher launch reliability. For the DOD, this was the vital consideration, and it warranted acceptance of a plan that would reduce the number of industry participants to one. The FTC regarded the scale economy, quality, and reliability arguments to be genuine and significant. There was considerable evidence from the production of launch vehicles and other defence systems that subdividing a relatively small and declining amount of work between two teams denied both teams the experience base needed to be successful. Neither the FTC nor the DOD regarded the alleged cost saving efficiencies to be significant.
During the review, Elon Musk made submissions insisting upon the adoption of conditions that would enable SpaceX to obtain government contracts allowing this entrant company to build capability to provide launch services to government. In most antitrust reviews, the FTC would not have regarded the possibility of entry and expansion by SpaceX as a basis for approving the merger. There were many reasons to discount the company’s prospects for success.
However, and given the DOD’s support for the merger, the FTC’s options were severely constrained. Going to court without the DOD’s support seemed to be a formula for a litigation failure. Further, even if the FTC had prevailed in litigation and obtained a judicial order blocking ULA’s formation, the DOD had the ability to foster the creation of a ULA equivalent if it desired to consolidate all development and production work for heavy launch vehicles in a single firm.
Finally, the FTC decided to close its investigation and clear the transaction after the government buyers provided soft indications that they would consider new entrants, but no hard concessions were embedded in an enforceable order. The Commission also attempted to make the terms of the resolution of the matter more transparent, by seeking and receiving from the DOD a letter that detailed the Department’s reasons for endorsing the transaction. The correspondence between the DOD and the FTC was made public when the parties announced the agreement, along with a detailed closing statement by the FTC itself.
Part IV provides an overview of the development of MTH launch services sector over the past decade.
From a competition policy perspective, the consolidation of the nation’s MTH launch capacity in the ULA venture was difficult for the FTC to swallow and a source of strong institutional discomfort. Yet, both assumptions that underpinned the FTC’s decision have been borne out: significant efficiencies have materialised and entry as occurred, preserving innovation and competition in the market. In head-to-head competitions with ULA since 2014, the U.S Air Force awarded SpaceX several national security launches.
Part V examines the policy implications of the ULA experience.
The inquiry attempted here is timely for current debates about competition law and policy. Some commentators have criticised modern antitrust enforcement for adopting a single-minded focus on the output and pricing effects of business practices and ignoring other important considerations, such as the impact of these practices on innovation and the development of new products and services. The ULA episode reminds us that innovation is not a novel antitrust issue and that innovation effects have been paramount (or at least coequal with price effects) in major categories of antitrust matters.
A second timely aspect of a review of the ULA transaction is the light it sheds on the many forms of government intervention that constitute a nation’s competition policy. The prosecution of antitrust cases is but one way by which governments can help foster competition and stimulate business rivalry. While the success of SpaceX has depended crucially upon the fulfilment by the government buyers of their soft commitment in 2006 to consider SpaceX as an alternative to ULA, NASA was the pivotal actor in this process. The agency encouraged the development of a new business model that relied mainly on the private sector to devise, deploy, and operate space vehicles – and encourage the private sector to participate in bids to send goods and people to the international state station. Perhaps most important, the ULA episode illuminates the power of public procurement policy, including the funding of private sector research and development and the acquisition of goods and services, to influence the course of competition.
A third insight emerging from this paper is the value for policy making of transparency and interagency cooperation that enables distinct institutions with shared or complementary policy duties to diagnose problems and devise solutions. The DOD collaboration with the FTC facilitated a well-informed decision making process and helped both institutions apply their skills usefully to the problem. The analysis also profited greatly from the accumulation of relevant expertise in both agencies over time. Finally, by putting their cards face up on the table, and setting out the key assumptions behind the ULA decision, the DOD and the FTC enabled students of competition law to better understand what happened, to see what worked, to identify what failed, and to do it better the next time.
This is a paper about rocket science and space missions. If you are not sold on that alone, I will be sorely disappointed. In addition, it is written by a participant in the merger review process looking back at a difficult decision he took in the past. This adds a fascinating personal dimension that is rare in competition papers. In which other paper would one get the impression that the author feels that he might owe Elon Musk a drink or two?
Personally, I really enjoyed the insider take on how defence mergers are subject to special public interest considerations, particularly because it goes against the official line on the topic. I was at times left floundering about whether the relevant benefits identified by the DOD (and accepted by the FTC) were efficiencies or some other form of public benefit.
In particular, it was not clear to me how these public benefits should be accounted for under the applicable merger review standard; even though it is clear that a contrary opinion by the DoD would make it very hard to sustain a prohibition decision in court. There is a footnote noting that a court could potentially clear the transaction on efficiency or public interest grounds, but, again, this did not clarify the legal basis for taking public interests into account, or how the distinction between efficiencies and public interest considerations is achieved.
My confusion was further compounded because, when I looked at the US contribution to the OECD 2016 Roundtable on ‘Public Interest Considerations in Merger Control’, it reads that ‘The U.S. antitrust agencies review mergers under a statutory standard focusing exclusively on competitive consequences. The agencies do not consider public interest factors beyond the public interest in the enforcement of the antitrust laws, and believe that enforcement decisions should be based solely on the competitive effects and consumer benefits of the transaction under review. The agencies’ actions are not subject to review under a general public interest standard by any other agency or government body, including the courts’ (emphasis is mine).
Despite – or perhaps because – this lack of clarity, I appreciated how the merger control authorities replaced formal court disputes with informal procedural coordination mechanisms. These mechanisms reflect the DID’s superior position in identifying both efficiencies and public interest considerations as regards such mergers – without the competition review agencies losing any of their competences. As you may have gleaned from earlier reviews, or the fact that I chose to practice competition law, I believe that to understand law one needs to look beyond its letter into its practice, and this paper is most illuminating on that front.
Going beyond the arcana of US merger control, the paper threads on a number of topics familiar to the author’s work. These include the importance of competition advocacy and pro-competitive institutional design; an emphasis on ex post analysis to improve policy- and decision-making; the limits of pure competition enforcement; and, related to this latter point, a certain scepticism for calls for antitrust to do more. I am not sure there is anyone else who can link all these elements as well as Bill, so on that basis alone this paper is worthwhile reading.
Mainly, though, read it because of the rockets and space missions.