Defense of the U.S. Requires the Defense of Innovation

10.03.2019

Any time two major players in industry begin talks of a merger the claims of antitrust gets thrown around, often as a gut reaction with little actual thought given to the benefits of the union. Other times antitrust accusations are made with much thought by competitors or those investors who fear immediate short-term personal loss. On 9 June, 2019 Raytheon Co (RTN) and United Technologies Corp (UTX) announced their plans to join forces to create an innovation powerhouse, and of course now the debate begins as whether or not the new Raytheon Technologies will stifle competition.

While I am a free-marketer at heart, it is incumbent on us to listen to both sides of the sides of the debate, yet time after time we see the benefits of mergers and the pros often win over the cons as horizontal consolidation tends to eliminate redundancy of enormous fixed costs and leads to savings that are ultimately passed down to customers. Two such examples are:

·        Disney and 21st Century Fox’s recent merger was initiated to assist in competing with streaming companies like Netflix, and gave Disney the ability to sell digital streaming channels for just over half the cost of a standard Netflix account.

·        The consolidation of JP Morgan Chase and Bank One Corporation allowed the bank to diversify its offerings outside of just investment banking and trading, leading the company to become the largest bank in America.

While such a merger will give Raytheon Technologies new capabilities to keep up with foreign R&D, we must keep in mind that the beauty of technology is it creates an environment where if you have a computer and an idea you can be successful. In fact, many of our tech advances have not been created by major technology giants, but rather by individuals in their college dorm rooms like Facebook and Google. WhatsApp was created by two former Yahoo employees using their personal savings and was ultimately sold to Facebook for $22 Billion.

When debating the antitrust issue within the context of the defense industry we must look at this from a different vantage point. In 1889 the commissioner of the U.S. patent office, Charles H. Duell, was widely quoted as saying “Everything that can be invented has been invented”, something that in 2019 we know is farthest from the truth. The race for technological advances within the defense sector has far greater impact than in any other sector. In an age where there is a renewed weapons race between the U.S. and it’s adversaries like China and Russia, mergers like this one between Raytheon and United Technologies become ever more significant.

With every passing day, month and year our weapon systems and those of our adversaries become more and more advanced.  Just recently a Saudi oil field was attacked by 18 drones allegedly from Iran. No longer are attacks of this precision that have global ramifications only able to come from superpowers like the U.S. or Russia or China, but also now by rather small countries like Iran.

China has emerged as a global science and technology leader, with strong funding in research and development (R&D), which from 2000 – 2016 has risen from 4.9% - 25.1% in global R&D. Russia is leading the race in hypersonic technologies, something that the United States has yet to be able to defend against, and Iran has placed a great deal of their efforts in weaponizing Cyber and EMP. The U.S. is currently in catch up mode.

Commonsense mergers are essential to American industrial competitiveness and more so within the defense, cyber and aerospace industries. We must keep our eye on the ball as we debate the issues of a Raytheon and United Technologies merger, and that is the defense of this nation. No matter what side of the antitrust issue you come out on, mergers of this sort are important.