The Way the Military Does Business
How does the Pentagon allow the industry consolidation to continue while preserving competition to avoid price gouging?</br></br>When President Eisenhower warned the nation in 1961 about the power of the military industrial complex, Pentagon spending accounted for more than 40 percent of the federal budget and about 8 percent of gross domestic product. Today the Defense DepartmentÛªs budget has shrunk to under 15 percent of federal outlays and 3 percent of GDP. And without a Cold War mission for the military, the numbers will continue to dwindle, creating greater pressure to get the best value for the defense dollar.</br></br>At one time the Pentagon counted on competition among prime defense contractors to foster innovation and keep prices in line. But this monthÛªs flurry of corporate dealmaking shows just how difficult that is going to be in the future. The $14 billion Boeing-McDonnell Douglas merger, which the Federal Trade Commission approved July 1, and Lockheed MartinÛªs $11.6 billion deal with Northrop Grumman, unveiled luly 3, come as the era of mega-merg-na by prime contractors is ending. The lext phaseÛÓcorporate marriages of suppliersÛÓis typified by RaytheonÛªs &2.9	billion purchase of Texas Instru-nentsÛª defense unit, which the Justice Department okayed July 2.</br></br>It poses a difficult dilemma for the Ûªentagon: How does it allow the indus-ry consolidation to continue while pre-ierving competition to avoid price 'ouging? The smaller corps of prime ontractors means the Pentagon must ely on competition among subcontrac-ors for that protection. But with sup-iliers also joining hands that safeguard vill be much less reliable.</br></br>Moreover, some industry analysts ear that Lockheed Martin's $9 billion uirchase last year of Loral Corp., an Jectronics systems subcontractor, will ggravate matters if it prompts more rime contractors to buy suppliers and ben favor their in-house units. The