DOD Expects Contractor Mergers As defense budgets shrink in the years ahead, the Pentagon will “welcome” mergers among contractors—except the biggest ones, says Ashton Carter, undersecretary of defense for acquisition, technology and logistics. In an interview with Bloomberg News Feb. 8, Carter said mergers among small contractors “could be in the interest of economic efficiency.” He added, “There are small businesses, there are parts suppliers which may grow in this time and that’s good.” After a huge run-up in defense spending during the wars in Iraq and Afghanistan, Defense Secretary Robert Gates has said he expects the department’s budget to grow no faster than the rate of inflation over the next five years. Some congressional critics want deeper cuts to help reduce the federal deficit. In the last round of rollbacks in defense spending, following the end of the Cold War, DOD officials encouraged mergers and acquisitions in the name of efficiency. Several years of busy M&A activity led to widespread consolidation in the industry, including the creation of Lockheed Martin, now the largest defense contractor, and mergers involving giants Northrop Grumman, Boeing and others. Now, Carter told Bloomberg, DOD is “down to about five or six very large prime contractors who bid on many, many of our jobs and, in the interest of competition, we are not interested in seeing further consolidation and reduction in that number. But with that exception just about everything else is on the table.” Deputy Defense Secretary William Lynn last month said the department is conducting a review of the defense industrial base to determine what its supplier base will look like in the future.