United States: Aerospace And Defense Series: Trump Administration—Potential For Increased Antitrust Leniency For Vertical Transactions In The Defense Industry


President-elect Donald Trump has called for a dramatic increase in defense spending including purchases of new ships and warplanes as well as the addition of tens of thousands of new troops. This increase in spending generally bodes well for the aerospace and defense industry and potentially signals a new era of growth for companies in this space. This article examines how M&A transactions are likely to be reviewed in a Trump administration, with particular focus on "vertical" transactions.

In Depth

A Trump administration is likely to create a more favorable environment for M&A in the aerospace and defense industry. President-elect Donald Trump has called for a dramatic increase in defense spending including purchases of new ships and warplanes as well as the addition of tens of thousands of new troops. This increase in spending generally bodes well for the aerospace and defense industry and potentially signals a new era of growth for companies in this space. Stock prices of aerospace and defense industry participants have seen significant increases with the S&P Aerospace & Defense index increasing more than nine percent in the two weeks following the US presidential election.

The substantial growth in this sector may make it a target for M&A activity and raises the question of how a Trump administration will address antitrust concerns in defense industry transactions. President-elect Trump has not been outspoken about his potential antitrust policies and was unpredictable throughout his campaign. Therefore, we can only speculate as to how his administration will approach antitrust enforcement. Nonetheless, the entrance of a Republican administration and a presumably pro-defense, pro-business president suggests a more permissive antitrust policy for transactions in this sector.

At the Margins, Expect Fewer Enforcement Actions and Less Focus on Vertical Theories under a Trump Administration

Antitrust enforcement with respect to horizontal transactions—which combine two competitors at the same level of production—appears likely to remain stable. Past enforcement and the Horizontal Merger Guidelines make clear that transactions which combine two players with significant market share and will likely limit the number of potential bidders for upcoming procurements will continue to receive diligent review by the antitrust regulators with input from the US Department of Defense, which plays a vital role in the investigations of competition for future procurements. This theory of harm through horizontal concentration is a bedrock principle of antitrust enforcement that has been applied in Republican and Democratic administrations. Despite that consensus, at the margins, Democratic administrations tend to be more enforcement minded. At the end of the second Bush administration, for example, the US Department of Justice (DOJ) chose not to challenge several transactions which it seems very likely that the Obama DOJ would have challenged, such as Whirlpool / Maytag and XM / Sirius.

On the other hand, it is likely that the Trump administration will reduce enforcement for vertical transactions. These are transactions that combine two players that do not compete against each other, but operate at different stages of production. Examples include a combination of a platform provider with a company that produces a payload used on that platform. Given the nature of the subcontracting and teaming relationships in the business, the aerospace and defense industry raises more vertical antitrust issues than most other industries. For this reason, a very high proportion of government challenges using vertical theories over the past several decades have involved transactions in the defense industry.

While it is not unprecedented for Republican administrations to bring a case alleging vertical harm to competition, such as Northrop Grumman/TRW under the Bush administration, these transactions generally receive less scrutiny under Republican administrations. Therefore, this is one area where a Trump administration is likely to reach different enforcement decisions than an Obama administration. Keep in mind, however, that the staff at the Federal Trade Commission (FTC) and DOJ are not political appointees. This means that the same people will be investigating transactions under the Trump administration. The staff generally will investigate the same competitive issues under the Trump administration that it would have investigated under the Obama administration, which means that vertical theories will remain part of the antitrust review process. The biggest difference is likely to be at the leadership of the DOJ Antitrust Division and the FTC, where the "front office" leadership will switch from Democrat to Republican. Those leadership teams are less likely to authorize staff to challenge transactions raising more nuanced or novel issues, including vertical theories of harm. Thus, while investigations are not likely to be much different, we do expect to see differences in the ultimate enforcement decisions.

Vertical Theories of Competitive Harm

Even if vertical concerns are less likely to lead to a challenge under a Trump administration, they are still likely to be fully investigated. Therefore, it is important for businesses to understand exactly what vertical antitrust concerns are. Vertical analyses are often highly fact-specific, but there are several primary theories of competitive harm that the regulators will consider.

Input Foreclosure

Input foreclosure is the most straightforward vertical theory of anticompetitive harm. Input foreclosure arises when one company that provides a critical component or input (e.g., a payload) that is used by suppliers of a downstream product (e.g., an aircraft) combines with one of the downstream competitors. In this scenario, the transaction may provide the combined entity with the ability and incentive to deny, or raise the prices of, the key input to its downstream competitors and thereby reduce competition. In evaluating the competitive impacts of a transaction that presents a risk of input foreclosure, regulators will assess a number of factors to predict whether the company will have both the incentive and ability to deny the component to its rivals including:

  • The availability of a competitive substitute supplier of the input
  • Whether the downstream competitors can realistically turn to the alternative suppliers
  • Whether the combined entity has the opportunity to increase its sales of the downstream product if it withholds the necessary input from competitors
  • The relative revenues and profit margins available from the sale of the input component compared to the downstream product

It should be noted that antitrust regulators are not just examining the current products and production relationships between the parties, but also reviewing a transaction's impact on product innovation. The regulators are concerned that the combined entity may have the incentive to raise the costs of developing new products for other competitors or foreclose these competitors from a vital innovation partner going forward. Key factors in this analysis will include the existing relationships between various players in the industry and the viability of other competitors as potential innovation partners.

Customer Foreclosure

Customer foreclosure arises when a very large purchaser of an input combines with a supplier of that input. If the large purchaser directs all of its purchases to its in-house supplier of the input, that may leave insufficient business opportunities for competing upstream suppliers of the input to operate at an efficient scale, thus reducing competition at the input level. A key factor in this analysis will be the portion of the demand for the input that is likely to be foreclosed by the combination.

Improper Information Exchanges

Perhaps the most common vertical concern arises when a company in an M&A transaction possesses sensitive proprietary information of a competitor to the other M&A transaction party. The risk here is that post-transaction the combined entity will now pass the sensitive information in-house and improperly use it, leading to a reduction in competition.

Substandard Products through Selection Bias

The concern here arises when an acquisition leads a downstream product supplier, which does not face significant competition in the downstream market, to opt to use its newly acquired in-house input rather than a competing input even though the in-house solution is inferior. The concern is this type of selection can create a lower-quality or higher-priced good and harms consumers of the downstream product.

Remedies for Vertical Transactions

If a transaction raises vertical concerns, the regulators will want to ensure a remedy is implemented to prevent anticompetitive effects from arising. In vertical transactions, remedies have often involved "conduct remedies" rather than requiring divestiture of one of the vertically related businesses. Examples of conduct remedies are firewalls to prevent the misuse of competitively sensitive information, or non-discrimination provisions requiring a critical input supplier to support multiple competitors. However, while regulators have been willing to accept these conduct remedies in the past, parties cannot assume that conduct remedies will always be accepted in the future. A senior DOJ official recently stated "[s]ome vertical transactions may present sufficiently serious risks of foreclosing rivals' access to critical inputs or customers, or otherwise threaten competitive harm, that they require some form of structural relief or even require that the transaction be blocked."

Aerospace and Defense Series: Trump Administration—Potential for Increased Antitrust Leniency for Vertical Transactions in the Defense Industry

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions