On June 5, 2018, the Federal Trade Commission (“FTC”) announced that Northrop Grumman’s (“Northrop”) $7.8 billion acquisition of aerospace and defense contractor Orbital ATK, a vertical merger that combined a supplier with its customer, could proceed so long as the Northrop agreed to certain behavioral remedies.
According to the complaint, Northrop is one of four companies capable of supplying the U.S. government with missile systems, including tactical missiles, strategic missiles and missile defense interceptors. Orbital ATK is the premier supplier of solid rocket motors (“SRMs”), which propel missiles to their intended targets and are an essential input for missile systems. The FTC’s complaint alleges that Northrop’s proposed acquisition of Orbital ATK would have reduced competition in the market for missile systems purchased by the U.S. government, resulting in less innovation and higher prices. The FTC was concerned that Northrop could raise prices on the motors on competitors or withhold them altogether, both of which the agency said would give the merged firm a clear advantage for missile contracts. Additionally, “the acquisition creates a risk that the proprietary, competitively sensitive information of a rival (solid rocket motor) supplier supporting Northrop’s missile system business could be shared with Northrop’s vertically integrated SRM business.”
To resolve the vertical competition concerns, the FTC required several behavioral or conduct remedies. First, Northrop was required to supply SRMs to competitors on a non-discriminatory basis. Second, Northrop was required to separate the operation of its SRM business from the rest of the company’s operations with a firewall. Third, the settlement agreement provides for the U.S. Department of Defense (“DOD”) to appoint a compliance officer to oversee Northrop’s conduct pursuant to the settlement. Fourth, the FTC required the merging parties to implement a compliance program and create regular compliance reports, to be submitted to the FTC, the DOD and the compliance officer. The FTC said that by ensuring that other missile suppliers can continue to compete, the settlement preserves the procompetitive benefits of the transaction while addressing the potential anticompetitive harms.