UPDATE 1-No room for mergers at top of US arms industry -Boeing
* Consolidation expected among small and mid-sized companies
* Number of big players already reduced sharply
By Andrea Shalal-Esa
WASHINGTON, Sept 4 (Reuters) - Boeing Co expects mounting pressures on U.S. military spending to result in further consolidation among second- and third-tier U.S. defense and space contractors, but says there is no space for mergers among the largest companies in the sector.
Dennis Muilenburg, president and chief executive of Boeing Defense, Space and Security, said small and medium-sized businesses that provide components for Boeing weapons systems were already under pressure and the situation could get worse if U.S. lawmakers are unable to avert an additional $500 billion in automatic budget cuts due to start taking effect in January.
The cuts, which would come on top of $487 billion in budget cuts already planned for the next decade, could have a "very significant effect" on smaller companies and may trigger a new wave of consolidation, Muilenburg told Reuters on Tuesday.
But he said the number of prime contractors had already been reduced sharply in number over the past two decades, leaving just sole-source suppliers for some weapons systems.
"At the large scale level we don't anticipate consolidation, nor are we advocating it," he said, adding that Boeing's military customers remained concerned about maintaining competition wherever possible.
"The number of companies that are in the prime category has gone down dramatically in the last two decades so there simply is not additional space to consolidate at that level," he said.
Muilenburg said Boeing was closely monitoring the health of its supply chain, which includes thousands of companies, to ensure continued competition wherever possible. He said the company was ready to help companies that provided critical components on a case-by-case basis.
In rare cases, Boeing could even consider acquiring struggling suppliers, but only if such deals made strategic sense for the company, Muilenburg said.
He said many of Boeing's smaller suppliers faced multiple challenges, with budget and economic pressures in Europe and the United States, although offset in part by growing demand for commercial aviation components.
Muilenburg said Boeing's defense division was sticking to its approach of growing organically and buying niche capabilities in areas such as intelligence, cybersecurity, unmanned systems and services.
"That's a strategy that's worked well for us. It's allowed us to grow," he said, citing a dozen acquisitions in the past three years.
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