America’s defense industrial base is in the throes of major change. For the first time in 40 years, major power war is a real possibility. Conflicts in Ukraine and Israel are providing a harrowing glimpse of what that war might look like. Technology is evolving at a dizzying pace. Instead of peacetime efficiency, governments are prioritizing wartime surge capacity. The “China shock” and COVID-19 have destabilized global supply chains.
Amid these daunting realities, a new generation of defense technology companies has emerged. Anduril Industries — which was founded in 2017 and which I joined in 2020 — is one of them. Of course, defense technology companies aim to make money. But these companies also aim to disrupt and transform American defense by changing culture, attracting new and better talent, harnessing commercial technologies, championing software, bolstering competition, reforming acquisition practices, and more. Only time will tell if they are successful. But perhaps not as much time as one might think. As more defense technology companies scale to compete with traditional defense primes, the contours of a new defense industrial base are emerging.
Changes to this scope, speed, and scale naturally lead to questions, anxieties, and fears. To wit, these pages recently carried a warning about an impending “new era of defense giants.” According to this view, defense technology companies are engaging in corporate acquisitions that mirror the defense industry consolidation carried out by the traditional defense primes after the end of the Cold War. This new consolidation is hurting small businesses and making America’s defense industrial base less diverse, resilient, and innovative.
Giants are commonplace in myths. A larger-than-life story requires a larger-than-life villain. And such is the case in the myth of America’s new defense consolidation. The truth is that the three decades of defense industry consolidation precipitated by the so-called “Last Supper” is over. And good riddance. America and its allies need a more diverse, more innovative, and more competitive defense industrial base that can deliver much greater production capacity. Defense technology companies are using every tool at their disposal, including acquisitions, to realize this vision, and they’re doing so with small businesses as vital partners.
Building a new defense industrial base requires an accurate understanding of what motivates mergers and acquisitions in defense, how defense technology companies are using acquisitions, and how recent acquisitions differ from the post-Cold War consolidation of traditional defense primes.
A Merger of Acquisitions and Consolidations
Concern about recent defense acquisitions often stems from the flawed assumption that acquisitions are in themselves evidence of defense industry consolidation.
In some cases, mergers and acquisitions can indicate a trend toward consolidation or a desire to increase market share in times of sectoral decline. Some defense primes are using acquisitions to shore up vulnerable supply chains. Acquisitions can also represent an attempt to capture growth amid uncertainty, a strategy often utilized by defense companies when government funding and contracts are inconsistent.
But in a much broader sense, the abundance of capital and agile capital markets, which facilitate active mergers and acquisitions, have been — and remain — key drivers of America’s technological advantage and dynamic innovation base. In this light, recent defense acquisitions are properly seen as an indicator of a growing, more dynamic, more innovative, more productive defense sector.
After decades of decline, global security risks have pushed the defense sector into a period of projected long-term growth in the United States and globally. That is driving an unprecedented infusion of private capital into defense, including more than $130 billion in venture capital investment in just the last four years. The availability of capital has helped patriotic entrepreneurs to create hundreds of new defense startups.
Private capital has also helped these new companies scale, including by funding acquisitions. Acquisitions help defense companies keep pace with technological change, fuel innovation, improve their products, and strengthen their competitive advantage. That is not unusual. It means defense is becoming more like other sectors with high innovation and growth — such as technology, energy, and financial services — which often feature significant mergers and acquisitions activity. The technology sector, in particular, shows that acquisitions can and often do go hand in hand with high rates of new business starts.
Acquisitions help attract even more new entrants to defense, including small businesses, by sending a market signal that a profitable exit is possible. This is a virtuous cycle of growth that should be embraced.
Acquisitions are also a key component of achieving economies of scale to counteract the dangerously insufficient production capacity of the defense industrial base. The Department of Defense does not just need more companies that innovate. It needs more companies that build at scale. Acquisitions that help more defense technology companies achieve that scale are evidence of the market effectively mobilizing private capital in response to government demand.
For example, when Anduril bought Blue Force Technologies, the defense industrial base did not lose an aircraft manufacturer. Rather, it gained a company with the right combination of talent, technology, and resources to give traditional industry a run for its money in autonomous aircraft. In the end, Anduril achieved a milestone victory with its downselection for the Collaborative Combat Aircraft program, beating out Lockheed Martin, Northrop Grumman, and Boeing. This win also belongs to the more than 40 small businesses that are now helping to build the YFQ-44A — the result of that program — for the U.S. Air Force. That is not industry consolidation. It is the kind of industry expansion that America’s defense industrial base needs right now.
Building the Defense Industrial Base America Needs
Mergers and acquisitions were common in defense after the Cold War, and they are common today. But these two periods of mergers and acquisitions are fundamentally different in their context, motivation, and objectives. Most importantly, they are producing different results.
The mergers and acquisitions of the post-Cold War era were explicitly aimed at achieving consolidation because the government believed fewer larger firms would be “more efficient at stretching limited budget[s]” that were only possible due to a rare and sudden reduction in the conventional military threat to America and its allies.
The “Last Supper” consolidation was a rational corporate response to reduced government demand. But it also produced a defense industrial base ill-suited to today’s challenges, hampered by risk aversion, diminished capacity, cost overruns, schedule delays, and performance issues. These consequences are felt today in Washington, Kyiv, and Taipei — and, worse, in Beijing and Moscow. Put simply, the arsenal of democracy is not delivering capability at sufficient speed and scale.
That is why today’s mergers and acquisitions in defense technology aim to create more firms of sufficient size that are capable of fast innovation and large-scale production funded by increased defense budgets necessitated by more severe and complex military threats to America and its allies.
In the 30 years after the Cold War, the United States created no new defense companies worth more than $1 billion. Then, SpaceX reached that milestone in 2010. Palantir and Anduril followed. Today, there are more than a dozen defense “unicorns.” Partly assisted by acquisitions, these companies are achieving technological maturity and economies of scale that create a more competitive defense market. As a result, the Pentagon has more vendors to choose from for its major weapons programs. That means it has more leverage to incentivize better cost, schedule, and performance for warfighters and taxpayers.
Meet the New Acquisitions, Same as the Old Acquisitions…
Yet for some, there is little difference between the “Last Supper” and the “First Breakfast.” This view was expressed most evocatively in these pages recently: “[T]oday’s defense technology companies, while positioning themselves as disruptors, are following the same consolidation playbook that created the primes they claim to challenge.” This playbook allegedly aims to dominate entire market segments, replicate military doctrine and requirements, and leave small business without a seat at the table.
Defense technology companies are certainly using acquisitions to enter new market segments. But not even the largest defense technology companies are anywhere close to capturing a market segment — and certainly not as the result of acquisitions. In fact, the market segments in which defense technology companies are most active — artificial intelligence, autonomous systems, space, software, and others — are some of the most diverse and competitive in the entire defense sector.
Indeed, the idea that defense technology companies are seeking — let alone achieving — dominance in certain market sectors belies the fact that all defense technology companies combined account for less than 1 percent of defense contract awards. The top five primes claimed more than 33 percent of contract award obligations in fiscal year 2023. Meanwhile, small businesses claim more than 25 percent of prime contract awards, a figure that has been steadily rising for the last two decades.
Moreover, none of the recent acquisitions by Anduril or other defense technology companies approach the scale of their “Last Supper” predecessors. The merger of Lockheed and Martin Marietta united what were then the second- and third-largest American defense contractors. Even after its recent acquisitions referenced in these pages, Anduril’s current estimated valuation is just one-quarter of Lockheed Martin’s market capitalization. Moreover, the three acquisitions specifically mentioned — Dive Technologies (28 employees), Copious Imaging (42 employees), and Blue Force Technologies (81 employees) — brought a total of 151 employees into the company. Adding that number of personnel every quarter of every year henceforth, it would take Anduril nearly 200 years to match Lockheed Martin’s current employment rolls. A new defense giant, indeed.
Another supposed similarity of recent acquisitions and those of the post-Cold War period is that military requirements — not just budgets — are driving industry consolidation. In the past, horizontal market segmentation defined by platforms mirrored the prevailing doctrinal distinction between domains of warfare. Today, the concern is that defense companies are consolidating to mirror the integration demanded by concepts like joint all-domain command and control. As consolidation continues, the risk of vendor lock increases as fewer companies are capable of meeting increasingly sophisticated military requirements.
But this argument seems to contradict the main thrust of defense acquisition policy over the last decade. Rather than fully integrated capabilities, the Pentagon has been emphasizing a modular open systems architecture approach, which aims to allow “plug and play” with hardware and software systems from different vendors. A good example of this is the Air Force’s extensive use of government reference architectures that enable the Air Force to maintain a larger stable of potential vendors through standard interfaces and continuous competition. Indeed, avoiding vendor lock seems to be top of mind for Pentagon officials, even for new concepts like joint all-domain command and control. When then Secretary of Defense Lloyd Austin signed a strategy for this concept back in 2021, defense officials stated explicitly that the secretary’s direction was that “the best solutions will be implemented as long as there is no vendor lock or proprietary limitation” and that joint all-domain command and control should be “open source.”
Finally, there is a view that today, as in the aftermath of the Cold War, the Defense Department’s focus on new defense giants produced by consolidation comes at the expense of small businesses, leaving them without a seat at the table. It is undoubtedly concerning that small business participation in the defense industrial base continues its decades-long decline. But the question is: What accounts for small business refraining from doing business with the Pentagon?
It is no mystery. Small businesses have answered this question in multiple surveys over the years: complex and protracted procurement processes, unstable and unpredictable defense funding, lack of support from defense customers, risk to intellectual property, burdensome compliance requirements, and more. There may be a survey out there in which small businesses say they are deterred by the prospect of lucrative acquisition offers they are free to accept or decline. I just have not seen it yet.
Yet, this is precisely what has been alleged in these pages: The Pentagon’s immutable thirst for consolidation and the acquisitive nature of defense technology companies are eliminating space for small business in defense. Never mind that small business participation in the defense industrial base was declining long before the emergence of defense technology companies. Never mind that small business prime contract awards dwarf that of venture capital-backed companies. And never mind that between 2010 and 2023, the decline in small business vendors for the Defense Department and that for the federal government as a whole were identical: 48 percent. At the very least, this suggests that barriers to small business in federal contracting are not unique to the Defense Department or the defense sector.
A Joint Force: Defense Tech and Small Business
It is time to turn the page on the defense industry consolidation of the last 30 years that has reduced competition and resulted in higher costs, less innovation, poorer performance, and more vulnerable supply chains. America needs a more diverse and competitive defense market that delivers improved cost, schedule, and performance. That requires the Defense Department to create new programs of adequate scale and volume — backed by sufficient, timely, and predictable funding — to provide new entrants and nonincumbents with opportunities to compete and win. And it means creating a culture of continuous competition that is embodied in acquisition policy. There should be no permanent winners or losers — only permanent competitors always looking to the next competition around the corner and constantly investing, innovating, and improving.
That is the defense industrial base in which defense technology companies and small businesses alike want to compete. That is the defense industrial base they can build together. Many, if not most, defense technology companies are small businesses. And those defense tech firms that are fortunate enough to achieve the requisite scale to compete with traditional defense primes will continue to rely on the invaluable contributions of their small business partners. Some may want to pit defense technology firms and small businesses against each other. But that is a losing game because, in the final analysis, defense technology companies and small businesses want the same thing: a chance to be ambitious, go fast, and demonstrate what they can do for America.
Dustin Walker is senior director for policy at Anduril Industries and a nonresident fellow at the American Enterprise Institute.
Image: Master Sgt. Gustavo Castillo via Wikimedia Commons
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