Having dealt with a capricious and disjointed U.S. government customer and regulator throughout their history, imaging satellite operators and shouldn’t be too surprised that it’s taking so long for the U.S. Department of Justice to approve their proposed merger. The drawn-out process is nevertheless ironic, since it was the government — albeit a different arm of government — that put them in a position that left them little choice but to try and join forces.
In January, the U.S. Department of Defense, the companies’ primary customer and benefactor, confirmed widespread rumors that it would be significantly scaling back its purchases of commercial satellite imagery in the coming years as part of a broader effort to rein in spending. This disclosure came less than two years after the National Geospatial-Intelligence Agency awarded DigitalGlobe and GeoEye 10-year imagery contracts worth more than $7 billion combined that required them to invest in highly capable — and very expensive — new satellites.
GeoEye’s EnhancedView contract was targeted for the lion’s share of the cuts, forcing the company into the arms of its competitor. But it seems likely that the merger pressures would have been irresistible even had the cuts been evenly distributed, the difference being that it likely would have been a merger of equals rather than a DigitalGlobe acquisition of GeoEye.
When the companies unveiled their link-up plan in July — this after a long-shot attempt by GeoEye to acquire DigitalGlobe — they expressed expectations that the deal would clear regulatory approval before the end of the year. Those hopes were dampened after the Justice Department’s antitrust division in September sent the companies a second round of questions, some of which raised eyebrows both in industry and at the Pentagon.
The boards of DigitalGlobe and GeoEye approved the merger Dec. 3, even as the companies conceded that the deal will not close until early 2013. Although it is difficult to imagine Justice suing to block the merger, the companies are paying hefty legal and consulting fees to allay the regulators’ antitrust concerns, and of course are unable to map out their eventual consolidation, thus deferring any savings that presumably will come from eliminating overlapping facilities and other efficiencies.
This is not to be overly critical of the Justice Department’s antitrust cops — they have a very important role to play and take it seriously, as they should. Monopolies almost invariably lead to higher prices and discourage innovation, and the DigitalGlobe-GeoEye linkup is not the sort of thing these regulators are used to seeing.
But the customer that is most directly affected by this merger is the very agency that took an action knowing full well that this would be the likely result. Moreover, the government will have other imagery options after the merger goes through, not only in its own satellites but also from emerging commercial providers like Skybox Imaging, whose first satellite is undergoing testing in preparation for a launch next year.
One can only hope that the Pentagon is working closely with the companies and with Justice to build a compelling case for approval, beginning with a frank assessment of GeoEye’s long-term survival prospects as a standalone company. This review need not, and should not, drag out much longer.