Pentagon Concerned Over ‘Nefarious’ Bidding, ‘Economic Warfare’ to Takeover U.S. Defense Companies

Pentagon Undersecretary Of Defense For Acquisition And Sustainment Ellen M. Lord speaking to reporters on April 30, 2020.

The Pentagon is concerned that falling share prices of U.S. defense companies, especially those in aerospace, could become targets of “nefarious M&A practices,” particularly from Europe “where the beneficial owner ends up being one of our adversaries,” Undersecretary Of Defense For Acquisition And Sustainment Ellen M. Lord told reporters on Thursday.

“What I am concerned about is nefarious M&A practices,” she said at a Pentagon briefing. “We have talked a lot with other nations, particularly in Europe, and we see a lot of shell companies coming in where the beneficial owner ends up being one of our adversaries. I’m particularly concerned about that.”

“We are talking to the Hill about strengthening some of our CFIUS legislation so that we have the statutory tools to intervene there.”

CFIUS, the Committee on Foreign Investment in the United States, is an interagency committee authorized to review certain transactions involving foreign investment in the U.S. to determine if there would be an impact on national security.

“I think we have to, regardless of the volume of M&A right now, we have to be very, very careful about the focused efforts some of our adversaries have to really undergo sort of economic warfare with us, which has been going on for some time.”

The immediate solution, Lord said, was to identify which companies might be at risk and use various government resources and programs to match them up with venture capital or foundation investors to shore up their capital bases.

Many of the shares of leading or specialist defense companies have fallen by more than 50% in the past year, according to this ranking by US News & World Report.

The deepest falls over the past year were in aerospace, including Spirit Aerosystems (SPR), down 74%, Astronics (ATRO), down 72%, and Triumph Group (TGI), down 68%. Defense giants were also hard hit; jet makers Embraer (ERJ) is down 67%, and Boeing (BA) fell 60%. Raytheon (RTX) is off 52%, General Electric (GE) is down 32% and General Dynamics (GD) is down 23%.

“I am concerned that some of the smaller companies might end up with some significant financial fragility, so we are not only working in the interagency to identify everything that the U.S. government has in terms of resources, but we are again looking back at our trusted capital methodology and coming up with some ways that we think are pretty creative, that we might again bring capital providers together with companies who are working in the areas that are critical to the Department of Defense.”

“So, again, we’re trying to develop these ecosystems to get those companies that have critical technology, talent, and facilities, together with those investors, whether they be venture capitalists or family foundations or whoever they might be, to bring the point of need to the point of relief, if you will, to help us through this.”

More diversified defense companies have weathered the storm unfettered. Lockheed (LMT) is up 20% over the past year, Northrop Grumman (NOC) is up 16%.

Company Industry
Price
USD
Returns
1-year
Returns
5-year
P/E Ratio
(TTM)
Spirit Aerosystems Holdings Inc – Ordinary Shares – Class A SPR Aerospace & Defense
$22.16
-74.21%
-14.96%
14.39
Astronics Corp. ATRO Aerospace & Defense
$8.98
-73.02%
-33.26%
17.44
Triumph Group Inc. TGI Aerospace & Defense
$7.04
-68.49%
-34.04%
n/a
Embraer S.A. – ADR ERJ Aerospace & Defense
$6.33
-67.95%
-26.61%
n/a
Boeing Co. BA Aerospace & Defense
$141.02
-60.39%
2.46%
n/a

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