Major Technology and Defense Deals Could Run into Roadblocks Under Biden

On July 9, 2021, President Biden issued an executive order, “Promoting Competition in the American Economy,” which mandates greater scrutiny placed on merger deals throughout multiple sectors. (The White House, Promoting Competition in the American Economy). The order makes clear that the current Administration’s policy is to “enforce the antitrust laws to combat the excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly.” Id. The order establishes a White House Competition Council, led by secretaries of multiple federal agencies, to “provide a coordinated response to overconcentration, monopolization, and unfair competition in or directly affecting the American economy.” Id. The order also encourages all appropriate agencies to vigorously and fairly enforce the Clayton Antitrust Act of 1914. Id. The executive order is one of the Administration’s first steps to strengthen enforcement against monopolistic behaviors, and President Biden will undoubtedly collaborate with and depend on his Congressional colleagues to pronounce his antitrust policy to regulators.

In May 2021, Amazon, Inc. (“Amazon”) announced its intent to acquire Metro-Goldwyn-Mayer Studios (“MGM”) for $8.45 billion, giving Amazon exclusive rights to thousands of hours of movies and television for its streaming services. Id. The acquisition could give Amazon substantial control over the content that competitors could put on their own streaming platforms. If similar acquisitions continue, a new streaming service may have access to limited exclusive content to offer to its customers, and this “excessive concentration” is a target of the Biden administration. Senator Elizabeth Warren (D-Mass.), one of President Biden’s most dependable colleagues in antitrust enforcement, praised the July executive order and urged Congress to pass new legislation to strengthen federal agencies’ ability to outlaw anti-competitive practices. (Elizabeth Warren, Statement on Executive Order). The month prior, Senator Warren wrote to Lina Khan, the newly appointed Chair of the Federal Trade Commission (“FTC”), to express her concerns that Amazon’s proposed acquisition of MGM could “reduce innovation by inhibiting competition in numerous markets.” (Elizabeth Warren, June Letter to FTC Chair). Additionally, Senator Warren cited a survey showing that the majority of small businesses feel that their growth opportunities have been hampered by Amazon’s disruption across multiple consumer industries. (Elizabeth Warren, June Letter to FTC Chair). Senator Warren urged the FTC to examine the effect of the proposed transaction on movie theaters across the country as well as the impact of a strengthened Amazon Prime on small businesses. Id. The FTC’s review of Amazon’s proposal is ongoing, and its outcome could serve as an early test for Chair Khan, who is expected to subject technology and defense mergers to more scrutiny than her predecessor. (Brent Kendall, The Wall Street Journal).

AT&T’s $43 billion deal to merge WarnerMedia with Discovery, Inc. (“Discovery”) is also pending, which merger would allow AT&T to compete for video streaming subscribers with Netflix and The Walt Disney Company. (Steve Kovach & Sam Meredith, CNBC). AT&T will use WarnerMedia’s assets to form a new media company with Discovery rather than acquiring a content unit of Discovery. Id. While the deal is still subject to regulatory approval, the merger’s terms indicate that AT&T shareholders will own 71% of the new company, while current Discovery shareholders will own the other 29%. Id. David Zaslav, Discovery’s CEO, is confident that the new company will differentiate itself from existing streaming services because it will broadcast both news and sports programming in addition to its movie and television enterprises. Id

Turning to the defense industry, on December 20, 2020, Lockheed Martin (“Lockheed”) announced its proposal to acquire Aerojet Rocketdyne (“Aerojet”), which is one of the last major independent suppliers of missile and rocket propulsion systems in the United States. (Lockheed, News Releases). The $4.4 billion deal could enhance Lockheed’s support of domestic and foreign national security missions while retaining the company’s leadership in hypersonic technology. (Valerie Insinna, DefenseNews). Thirteen lawmakers recently endorsed the deal, which will be reviewed by both the FTC and the Department of Defense. (Joe Gould, DefenseNews). Notable signatories included Representative Womack (R-Ark.) and Representative Veasey (D-Texas). Id. Their endorsement is not surprising considering that Aerojet opened a new rocket motor manufacturing facility in southern Arkansas last year, and Fort Worth, Texas, is home to Lockheed Martin Aeronautics. (Aerojet, News). Representatives Womack and Veasey argued that the merger is in the best of interest of national security and would “restore competitive balance” following Northrop Grumman’s acquisition of Orbital ATK, another major propulsion supplier, in 2018. (Joe Gould, DefenseNews). The FTC’s approval of the Northrop Grumman deal was contingent on the company’s adoption of “behavioral remedies,” such as making its propulsion systems available to competitors for their own missile contracts. Id. Despite this contingency, Senator Warren noted in a July letter to Chair Khan that reports indicate that the FTC may have commenced an investigation into the failure of Northrop Grumman to adopt such remedies for their acquisition. (Senator Warren, July Letter to FTC Chair). Senator Warren urged the agency to publicly release the findings of the purported investigation and to consider its findings when it reviews Lockheed’s proposal. Id.

In that same letter, Senator Warren noted that it can be very difficult for external entities to monitor a company’s compliance with an imposed remedy, and that behavioral remedies are often designed to require a company to operate in a manner which does not maximize profits. Id. On this basis, Senator Warren cautioned the FTC to be “particularly careful” before conditioning future approvals of defense firms’ mergers on the adoption of a remedy. Id. In response, Chair Khan agreed with Senator Warren’s skepticism for behavioral remedies and stated that antitrust agencies should consider outright opposition of anticompetitive deals rather than strong reliance on behavioral remedies. (Lina M. Khan, Letter to Senator Warren). Chair Khan also clarified that the Department of Defense’s approval is not necessary for defense sector transactions because while their consultative role is important, antitrust agencies are responsible for determining whether a defense transaction should be challenged. Id.

In light of Senator Warren’s July letter and the Chair Khan’s response, companies operating in the technology and defense sectors should prepare to strenuously defend proposed merger transactions. However, these companies should not exclusively rely on the potential for a behavioral remedy to secure the FTC’s approval because that remedy may not be available. Lisa Khan’s appointment as Chair to the FTC and President Biden’s executive order will likely be reflective of the Administration’s overall antitrust policy. Therefore, companies considering potential mergers should take proactive actions to respond to this trend or else they risk complete rejection of a lucrative deal.