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Conglomerates or Alliances?

The defense industry may not be headed for another merger wave, but something much more interesting.

Bankers, lawyers, and other business advisors have been waiting for years for that coming wave of mergers amongst military contractors. As one consultant told me recently, his firm was founded on the notion that some post-post-Cold War consolidation would eventually make the partners rich. Of late, however, most of what they’ve been seeing is what David Benoit of the Wall Street Journal called (18 February) the “New Push to Throw Assets Overboard”. Sure, the WSJ headlined this week that “Engility, TASC to Merge in $1.1 Billion All-Stock Deal” (28 October). But the two firms only got to that point because Northrop Grumman unloaded TASC back in 2009. The larger enterprise was seeking to avoid the organizational conflict-of-interest inherent in owning a subsidiary that advised the government on how to deal with the parent company. Back in 2001, Northrop’s management thought buying TASC was a great idea. So what accounts for these shifting sensibilities?

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