Analysts see red flags in Northrop’s acquisition of Orbital ATK

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NATIONAL HARBOR, Md. — News of the $9.2 billion acquisition by Northrop Grumman of Orbital ATK has been met with mixed reactions on what it could mean for the Pentagon’s space business.

In a conference call on Monday executives from both firms described the combination of both companies as a “complementary fit.”

Industry analysts see the merger as a natural consequence of constrained government spending and pressure on corporations to reduce costs. But they also are raising potential red flags such as the possibility that a larger, more vertically integrated company would leave the military with fewer choices in certain sectors of the market.

One concern is what implications this merger could have in ongoing efforts to modernize the nation’s intercontinental ballistic missiles. Orbital ATK is one of two key suppliers of rocket motors that would power future ICBMs. The two prime contractors that were selected to design the next-generation “ground based strategic deterrent” ICBM  — Boeing and Northrop Grumman — had been expected to compete the rocket motor work between Orbital ATK and Aerojet Rocketdyne.

With Orbital under Northrop Grumman ownership, that type of competition would not be possible. “It will be interesting to see how the Air Force responds with regards to the GBSD program,” space and defense analyst Todd Harrison, of the Center for Strategic and International Studies, told Spac News. “If there is any area for pushback, that may be it.”

Outside of GBSD concerns, “I think this merger makes a lot of sense for both companies,” Harrison added. “In the space segment, Northrop has been a leader in satellite payloads but not so much when it comes to developing complete systems. This acquisition vertically integrates their business by bringing in Orbital’s expertise in satellite buses, launch systems and other areas.”

Both firms work in classified satellite markets, and so an issue is how — if at all— consolidation could impact this segment, Byron Callan, of Capital Alpha Partners, noted in an email to clients. Orbital is a subcontractor for composite structures on the B-21 bomber to Northrop Grumman. “While this program is still in development, vertical integration will also be a focus in DoD’s review of the transaction,” commented Callan.

Orbital ATK generally benefits from the deal, said Callan, as it faces uncertainty in commercial space launch and aggressive competition from SpaceX.

Robert Stallard of Vertical Research Partners views the merger as favorable to both sides. “Northrop already has a significant presence in payloads, it has not had launcher capability which is one of the areas that Orbital ATK brings for both space and missile defense,” he wrote in an email to investors.

One caveat: “Given that Northrop already operates in the space field, it is possible that there could be some overlapping activity or increased vertical integration that could prompt regulatory scrutiny,” said Stallard.

This would be the first prime contractor acquisition under the Trump administration, and will be seen as a test case. Concerns over the scale of the primes were deal breakers in previous administrations.

Northrop and Orbital executives approached by SpaceNews at the Air & Space conference here declined to comment beyond what was said in the official statements.