Litton To Settle Charges in PRC Acquisition: Will Divest System Engineering Contract for Navy Aegis Destroyer

Will Divest System Engineering Contract for Navy Aegis Destroyer

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Litton Industries, Inc, has agreed to divest the multi-million dollar systems engineering and technical assistance contract for the Navy’s Aegis destroyer program to settle Federal Trade Commission charges that its $425 million acquisition of PRC Inc. would violate antitrust laws. Litton is one of two defense contractors that manufacture Aegis destroyers for the Navy, and PRC is the sole systems engineering and technical assistance contractor for the program, developing technical specifications for Aegis procurements and evaluating bid proposals and contractor performance.

“Taxpayers deserve to have the best military defense systems at the most competitive prices,” said William J Baer, Director of the FTC’s Bureau of Competition. “This settlement will preserve competition and encourage cost-containment in the Navy’s Aegis program,” he said.

Litton proposed to buy PRC, a McLean, Virginia-based subsidiary of Black and Decker, in December, 1995. PRC’s systems engineering and technical assistance (SETA) contract for the Aegis program is valued at approximately $40 million over the life of the contract.

The Aegis destroyer employs a high-technology tracking and defense system. Since the program’s inception, the Navy has awarded “split” construction contracts, under which the two bidders share the contract, with the better bid winning a larger share of the contract. While Litton and General Dynamics have shared these manufacturing contracts since the beginning of the Aegis destroyer procurement program, PRC has been the only supplier of SETA services to the program, providing procurement specifications, assessing bid and other proposals and evaluating the cost and quality performance of the contractors.

According to the FTC complaint detailing the charges, entry by a new company or companies into the market to manufacture the destroyers or to provide SETA services for the program is unlikely. In addition, the FTC charges that Litton’s acquisition of PRC and its SETA contract would allow it access to competitively sensitive, non-public information about the only other Aegis destroyer producer --General Dynamics. The complaint alleges that access to that information could give Litton a competitive advantage and result in increased prices for the Aegis program.

The proposed consent to settle the FTC’s charges, announced today for public comment, would require that Litton divest PRC’s Aegis SETA contract and any associated assets necessary to assure uninterrupted service, within 90 days, to an acquirer approved by the Commission and the Navy. In addition, it would require that PRC provide for one year, any technical assistance required by the company to execute the contract successfully. If Litton does not complete the divestiture within 90 days, the Commission can appoint a trustee to implement the divestiture. Finally, Litton has signed an interim agreement, in which it has agreed to be bound by the terms of the order contained in the consent agreement, as if it were final.

The Commission vote to announce the proposed consent agreement for public comment was 5-0, with Commissioner Mary L. Azcuenaga issuing a separate concurring statement. In her statement, Commissioner Azcuenaga said, “I concur in the Commission’s action except to the extent that [it] makes the Department of the Navy a participant with the Commission in giving antitrust approval to any divestiture proposed under...the order.” She continued, saying that although “the Department of the Navy has the power to decide with which firms it will contract for the provision of goods and services vital to the national security, no persuasive argument has been presented to suggest that the Navy has or should have a role in deciding the competitive implications of a particular divestiture.” She concluded, “The Commission might well find it necessary to consult with the Department of the Navy both to assess the viability of a proposed buyer of the PRC assets to be divested and to ensure that a proposed transaction is not inconsistent with the national security. I would have preferred, however, to accommodate that need in this case by means other than making the Department of the Navy a partner with the Commission in interpreting and applying a final order of the Commission.”

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $10,000.

Copies of the complaint, consent and an analysis to aid public comment are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 202- 326-2502. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710 FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at:

(FTC File No. 961 0022)

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