Boeing (NYSE:BA) is attempting to enlist the U.S. government to help it battle Northrop Grumman (NYSE:NOC) for a $60 billion contract to replace the Air Force's intercontinental ballistic missile. The company has complained the deck was stacked against it in the competition, but is now pushing Congress and the Pentagon to intervene.
In July Boeing surprisingly reversed course and decided not to compete in the government's massive Ground Based Strategic Deterrent (GBSD) contest, leaving Northrop as the sole remaining bidder. The GBSD is a key cog in the Pentagon's $500 billion plan to modernize its nuclear arsenal and keep the nation's powerful nuclear deterrent in place. It's also one of the largest procurement contracts currently available.
Despite Boeing's announcement, technically the competition is still ongoing. On Sept. 16, Northrop announced a long list of subcontractors who were partnering on its bid, including a who's who list of defense giants like Lockheed Martin, General Dynamics, L3 Harris Technologies, Honeywell, Textron, and United Technologies' Collins Aerospace.
Boeing was noticeably absent from the list. Boeing officials said they had made overtures about joining the Northrop team in a unified bid but said that effort was rejected.
"We think clearly it's time for the Air Force or other governmental entities to engage and direct the right solution. Northrop has elected not to do that," Frank McCall, Boeing's director of strategic deterrence systems, told reporters at a Sept. 17 Air Force conference. "So we're looking for government intervention to drive us to the best solution."
Boeing's Minuteman is the incumbent international ballistic missile, but it's an aging design that the Pentagon hopes to replace by 2027. In 2017, the Air Force awarded Boeing and Northrop Grumman $349 million and $329 million, respectively, to develop competing new designs, with a goal of selecting a winner next year. Lockheed Martin had also been interested in the contract but was eliminated in 2017.
Last year Northrop spent $9.2 billion to acquire Orbital ATK, in part with this competition in mind, and Northrop Grumman's ownership of Orbital, the nation's primary producer of rocket motors, is at the heart of Boeing's objection. In a July letter to the Pentagon explaining its decision to drop out, Boeing complained that the Air Force "takes no steps to mitigate Northrop's anticompetitive and inherently unfair cost, resource, and integration advantages," and said Northrop has also been unwilling to enter into an agreement that would prevent the sharing of confidential business information.
McCall this week told reporters that Boeing was standing firm on its decision not to bid on the GBSD if the request for proposal is not changed. He also would not rule out the company launching a protest with the Government Accountability Office should the company be left out in the cold.
According to McCall, Boeing would like the Air Force to work with the two companies to come up with a hybrid solution that would best serve the country's needs. He said Boeing has begun discussions with key lawmakers about the contract, a sign it's looking to get Congress involved.
Deja vu for Northrop?
Northrop and Boeing have clashed before, including in one of the more contentious procurement battles in recent memory. Northrop, teaming with Airbus, in 2008 won a $35 billion deal to build refueling tankers for the Air Force. But that deal was eventually overturned after political pressure, and Boeing in 2011 won a $49 billion contract to supply 179 tankers based on its own design.
The GBSD is very different from the tanker competition, but Northrop has every reason to get the deal done as quickly as possible to avoid a repeat. As the lead contractor on the new B-21 bomber, and the provider of solid rocket motors for missiles to be launched off the new generation of nuclear submarines, Northrop is building a dominant franchise catering to the Pentagon's effort to overhaul the nuclear triad.
The Pentagon is loath to award high-profile uncontested contracts, and given the political scrutiny likely to accompany the GBSD award, military officials have every reason to try to work out a compromise. Boeing initially appeared to want the Air Force to reboot the process under new ground rules, a decision that seems unlikely considering the development process is at an advanced stage. But it's possible Northrop could be forced to give Boeing a seat at the table in order to complete a deal.
Investors should be on the lookout
Investors in defense companies would be wise to carefully watch how this competition plays out. If Northrop Grumman was to win outright, the GBSD would join the B-21 as flagship programs that will help drive revenue into the next decade. For the rest of the industry, the Pentagon's decisions could provide insight into the government's thinking on key issues that go well beyond this contract.
Boeing, in making its complaint, is calling into question whether Northrop Grumman should have been allowed to buy Orbital ATK, and comments from the White House and some military officials would suggest that there are some in the government who are sympathetic to that view. A strong condemnation of Northrop Grumman by the Air Force, or a decision to reboot the program, could be taken as a sign that future deals in the defense industry, including United Technologies' pending merger with Raytheon, could be in for a more difficult review.
The Air Force's decision should also reveal how the Pentagon is currently prioritizing speed of procurement relative to its desire to see more competition on important deals. Military leaders have been lamenting a lack of competition in key areas, but a decision to green-light an unopposed Northrop bid without a compromise or recompete would suggest at least some degree of openness to sole-bid contracts.
Given the size of this competition, and the importance of the nuclear triad to the nation's defense, the GBSD program needs to be on every defense investor's watch list.