May 14, 2024

Scrutiny of U.S. Defense Contractor-Related M&A Activities Will Soon Intensify

Bottom Line, Up Front

Current and future U.S. defense contractors, and entities interested in acquiring these contractors, should prepare for increased regulatory scrutiny of mergers and acquisitions (M&A) transactions. Congress is signaling that it will push for more oversight of M&A activities that specifically involve and affect the defense industrial base (DIB).


The National Defense Authorization Act (NDAA) for Fiscal Year 2023 required the U.S. Government Accountability Office (GAO) to study the impact of M&A on the DIB and determine whether the Department of Defense (DoD) possessed sufficient authority and oversight processes to prevent M&A transactions that would ultimately harm U.S. national security interests. In response, on October 17, 2023, the GAO published a report titled “DoD Needs Better Insight into Risks from Mergers and Acquisitions.” The GAO’s report addressed, in pertinent part, the extent to which the DoD has actual insight into defense-related M&A, how the DoD’s role as a stakeholder in antitrust agencies affects how it conducts M&A assessments, and the extent to which the DoD is monitoring the impacts of M&A on the DIB. In February and March 2024, U.S. Sen. Elizabeth Warren (D-MA) was joined by others on the Hill in issuing letters to the Secretary of Defense discussing the importance of the DoD’s role in monitoring and analyzing the impact of M&A activities on critical supply chains and national security matters as well as highlighting key issues identified in the GAO report. While specific legislation in this area has not yet been introduced, it appears that Congress is signaling loudly that M&A transactions involving DoD contractors will soon face increased regulatory scrutiny and oversight.

The GAO Report

The GAO’s report concludes that the DoD’s insight into M&A involving the DIB is limited. According to the GAO, the DoD’s insight is limited in part because agencies handling antitrust issues review only transactions that meet a certain dollar threshold ($114 million today). Therefore, these agencies request the DoD’s input only on defense-related M&A transactions that exceed that threshold. Further, the DoD’s Industrial Base Policy (IBP) Office, which is charged with determining the need to assess defense-related M&A transactions, assesses only a small number of high-value defense-related M&As. In fact, of the roughly 400 defense M&A transactions estimated to occur annually, the DoD has reviewed only 40 transactions per year on average. The GAO’s report concluded that the DoD does not review a significant number of transactions that could negatively affect the DIB.

The GAO’s report ties the DoD’s deficiencies in this area to a lack of clear guidance and resources to aid DoD officials responsible for providing the DoD’s input on M&A transactions to federal antitrust agencies. For example, the DoD’s current policy for assessing M&A involving the DIB, DoD Directive 5000.62, explains that the DoD should consider the effect of M&A on competition, national security, and innovation, but it does not provide a methodology for such assessments.

In its report, the GAO makes the following recommendations:

  1. The Secretary of Defense should ensure that the Assistant Secretary of Defense for Industrial Base Policy provides clear direction as to which major defense suppliers the Office of Industrial Base Policy should prioritize for the purposes of conducting M&A assessments. 
  2. The Secretary of Defense should ensure that the Assistant Secretary of Defense for Industrial Base Policy assesses whether its M&A office is adequately resourced to consistently carry out its responsibilities. 
  3. The Secretary of Defense should ensure that the Assistant Secretary of Defense for Industrial Base Policy provides the Office of Industrial Base Policy and DoD stakeholders with additional direction on assessing the full range of risks and benefits identified in the DoD’s M&A policy, such as those that affect national security when developing the DoD’s new instruction or other appropriate guidance. 
  4. The Secretary of Defense should ensure that the Assistant Secretary of Defense for Industrial Base Policy revises the DoD’s M&A policy to direct the Office of Industrial Base Policy, with support from relevant DoD stakeholders, to monitor the effects of concluded mergers or acquisitions in areas in which the DoD had identified risks during its original assessment of the ongoing M&A transaction, to determine if risks were realized or if additional action is needed.

Upon review, the DoD concurred with all four recommendations, stating it will soon promulgate a new written instruction that will provide guidance on conducting assessments of M&A transactions. The DoD also has stated that it will request additional funding to support and increase its M&A review and oversight in the fiscal year 2025 budget cycle.

Congressional Action

Following the release of the GAO’s report, Sen. Warren sent two letters to DoD leadership amplifying concerns expressed in the report.

On February 23, 2024, Sen. Warren and Rep. John Garamendi (D-CA 8th District) sent a letter to the Secretary of Defense, expressing concerns about how the DoD’s current review process of the DIB affects supply chains, innovation, and national security. The letter argues that the current process restricts the DoD’s supplier options and subverts a fair bidding process. Additionally, the letter emphasizes the importance of transparency and cites Section 857 of the NDAA for Fiscal Year 2024 as granting the DoD greater bandwidth in assessing risk. Section 857, which enacts a new DoD authority, requires parties to simultaneously notify and provide the same information to the DoD that they are already required to provide to the Department of Justice and the Federal Trade Commission for certain M&A transactions.

In a March 18, 2024, letter to the Secretary of Defense, Sens. Warren and Mike Rounds (R-SD) highlight key concerns detailed in the GAO’s report. The letter emphasizes a notable gap in the DoD’s approach toward M&A transactions involving the DIB, claiming that the DoD focuses primarily on reviewing high-dollar value transactions and transactions that affect competition, instead of focusing on reviewing transactions that are most likely to affect national security, innovation, and supply chains. The letter recommends that the DoD adopt a more comprehensive review process that prioritizes safeguarding national security interests.


The GAO’s report concludes that the DoD routinely fails to review specific M&A transactions that could negatively affect national security. The report proposes four recommendations to enhance the assessment process of M&A transactions involving the DIB, which the DoD has acknowledged. Members of Congress have subsequently amplified the GAO’s findings through the publication of letters to DoD officials, which puts additional pressure on the DoD to act. Even though legislation in this area has not yet been introduced, it appears that M&A transactions involving the DIB could soon face increased regulatory scrutiny and oversight, of which defense contractors should be aware.

Going forward, and in preparation for the regulatory oversight that is to come, members of the DIB who anticipate engaging in M&A activities and transactions should familiarize themselves with the GAO’s report and stay abreast of DoD guidance and policy related to department involvement and oversight in this area. Contact a member of Goodwin’s team to discuss developments or questions about this alert.


This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.