The U.S. Government Accountability Office (GAO) has published a report focusing on the risks associated with mergers and acquisitions (M&A) in the defense space and concluded that the U.S. Department of Defense's (DOD) insight into defense M&A is limited. Of the estimated 400 defense-related M&A transactions that occur annually, DOD's Industrial Base Policy office and DOD stakeholders reviewed an average of about 40 deals each year. Of those reviews, the majority focused on competition risks posed by the transactions.

The DOD's stated policy is to review M&A activity for potential risks to national security, innovation in the defense industrial base and higher costs to the federal government, as well as antitrust concerns, but the GAO found that this is generally not occurring. The DOD is also not routinely reviewing transactions for the potential benefits of M&A, such as improving the financial health of key suppliers or monitoring longer-term outcomes of M&A after a transaction closes.

According to the GAO report, the primary issues underlying the DOD's approach to M&A review in the recent past include a lack of clear direction in the DOD policy regarding which transactions to prioritize and understaffing in the DOD M&A office. As part of its report, GAO made four recommendations: "provide additional direction on assessing all risks and benefits identified in policy, clarify which defense suppliers' M&A need to be prioritized for assessment, assess whether Industrial Base Policy's M&A office is adequately resourced, and require monitoring of identified risks."

DOD concurred with these recommendations and has outlined certain actions it intends to undertake to address them. Defense contractors and companies in the DOD supply chain, as well as potential investors in the space, should expect to see the DOD ramp up its resources dedicated to monitoring M&A activity in the market and increase its scrutiny of transactions. The Holland & Knight Government Contracts Group continues to monitor this space for developments.

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