WASHINGTON Further big budget cuts could make the U.S. Defense Department rethink its current wariness about additional mergers among top-tier companies in the weapons industry, a top Pentagon official told Reuters on Wednesday.
Senior Pentagon officials told industry last year that mounting budget pressures could result in increased mergers, spinoffs and market departures among weapons makers, although they said they did not believe consolidation was needed among the very largest companies in the sector.
But $500 billion in automatic across-the-board reductions that are due to start taking effect on January 2, on top of $487 billion already planned for the next decade, could change the department's thinking on mergers and many other issues, according to industry executives and military officials.
Brett Lambert, deputy assistant secretary of defense for manufacturing and industrial base policy, said the department's position -- first announced in February 2011 -- had not factored in the additional budget cuts known as sequestration.
"If sequestration is not averted, we would have to go back and re-examine everything, including fundamental strategic tenets," Lambert told Reuters.
The department's current policy does not forbid mergers among big weapons makers, but says the government is "comfortable" that the current number of prime contractors in the sector would ensure continued competition.
Lambert said any merger proposals -- even at the top tier -- would be examined on a case-by-case basis, he said.
Top executives at weapons makers have warned that additional budget cuts would have a devastating impact on national security and employment in the industry, and could unleash a new wave of consolidation among small- to mid-sized companies.
Some said the Pentagon would likely have to revisit its current policy on bigger mergers as well, depending on the scale of further budget cuts.
Northrop Grumman Corp Chief Executive Wes Bush told Reuters the Pentagon had firmly signaled its opposition to mergers among the handful of big prime contractors left after a massive wave of consolidation in the 1990s.
"(That) The department has taken a certain position today is reflective of their view of the budget situation. If that is not the reality of the future, then I think they'll go back and re-look at that," Bush told Reuters.
He suggested such mergers might be needed if companies were to continue driving costs lower, in line with the Pentagon's cost-cutting initiatives. "Ultimately the ability of companies to support the affordability agenda of the department is connected to the market environment," he said.
Linda Hudson, chief executive of the U.S. arm of BAE Systems, told Reuters last month the scale of change would not reach that of the 1990s, when mergers pared two dozen companies down to just a handful after the end of the Cold War.
She said Pentagon officials opposed mergers at the top of the food chain, but added that such high-level deals could still be on the horizon, depending on how deep the coming budget cuts turn out to be.
"If budgets are cut enough, there will be consolidation at all levels," Hudson said.
Dennis Muilenburg, chief executive of Boeing Defense, Space and Security, said he did not expect consolidation among the biggest companies, whose numbers had already been reduced sharply over the past two decades.
"At the large-scale level we don't anticipate consolidation, nor are we advocating it," he said. "There simply is not additional space to consolidate at that level," he said.
Lambert said the department had learned important lessons from the consolidation of the 1990s, which reduced the number of companies in the sector but did not result in nearly the overhead cost and capacity savings that had been expected.
"It is debatable how much value the department and the taxpayer actually derived from that consolidation," he said.
(Reporting By Andrea Shalal-Esa; Editing by Paul Tait)