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Lawmakers request review of two defense industry acquisitions

Two TransDigm acquisitions have raised pricing concerns over spare parts for the Pentagon.

Warren and other liberal lawmakers want the administration to take a hard look at two TransDigm acquisitions.
Warren and other liberal lawmakers want the administration to take a hard look at two TransDigm acquisitions. (Tom Williams/CQ Roll Call file photo)

Three liberal Democrats pressed the Biden administration in writing on Sunday to “closely scrutinize” a pair of defense industry acquisitions to ensure they don’t worsen “price gouging” on military spare parts. 

The letter, obtained by CQ Roll Call, was sent to leaders at the Pentagon, Justice Department and Federal Trade Commission by Sen. Elizabeth Warren of Massachusetts and Reps. John Garamendi of California and Mark Pocan of Wisconsin. Warren and Garamendi are Armed Services Committee members in their respective chambers, and Pocan is an appropriator. 

In the letter, the lawmakers urged a hard look at TransDigm Group Inc.’s acquisition of two specialized aerospace parts builders: SEI Industries LTD and Raptor Labs Holdco, LLC.

“There is no indication that these mergers and acquisitions will have a beneficial impact on taxpayers or national security,” the members wrote in their letter to Defense Secretary Lloyd J. Austin III, Assistant Attorney General for the Antitrust Division Jonathan Kanter and Federal Trade Commission Chair Lina M. Khan. 

9,400 percent ‘excess profit’

The letter represents the latest in a series of congressional efforts over the last few years to rein in what auditors have called excessive costs of many military spare parts. 

These lawmaker initiatives have included previous demands to the administration for both information and action, plus provisions in recent NDAAs and Defense spending measures. 

TransDigm has been at the center of these concerns. 

The company has a business model of buying up smaller companies — at least 88 so far, Friday’s missive said. The acquired firms often have low-dollar-value contracts with the Defense Department that they did not compete for and that typically fall below dollar thresholds requiring that certified cost and pricing data be presented to the government to determine fairness and reasonableness. 

In many cases, TransDigm has charged prices for spare parts that are excessive, auditors have determined.  

TransDigm charged $4,361 for a half-inch metal pin — representing nearly 9,400 percent in excess profit, the Pentagon inspector general reported in 2019. 

In that audit and another in 2021, the IG documented a total of $37 million in “excess profit” reaped by TransDigm on military parts deals.

TransDigm has also refused to provide the Defense Department cost and pricing data on many of its parts since that time.

CQ Roll Call disclosed last November that TransDigm had declined to provide the Pentagon with cost data on 401 different items in a one-year period ending September 2022, according to a Defense Department report to Congress on contractor cost disclosures.

In the report, Defense Department Undersecretary for Acquisition and Sustainment William LaPlante said: “The Department believes the problem in obtaining data from contractors to support fair and reasonable prices may be more prevalent than what has been collected to date, particularly with respect to sole source commercial products.”

‘Strong pricing power’

Boeing Co. also has drawn criticism from lawmakers for refusing to provide the Pentagon with cost and pricing data.

And Boeing and other major contractors have been found to overcharge for spare parts over the years.

But TransDigm has stood out for its reported excesses.

Regardless, the company’s stock has done well.

ClearBridge Global Growth Strategy told investors earlier this year that TransDigm has “strong pricing power coming from regulatory barriers that limit the number of competitors and due to its proprietary intellectual property, which makes it a sole supplier of many certified aircraft parts. We believe the company will see long-term duration of growth ahead as it benefits from the expansion of the aerospace aftermarket and acquisitions in this still-fragmented space.”

Loophole or streamlining?

Some lawmakers have sought to address what they call loopholes in Pentagon rules governing when companies must certify to the government the accuracy of their cost and price information. Exceptions to that requirement have been carved out for commercial products and for deals worth less than $2 million.

Warren has joined with Garamendi and Sen. Mike Braun, R-Ind., on legislation that would close some of the perceived loopholes.

Warren has advocated similar measures aimed at federal contracts outside the Pentagon.

The last couple of defense policy bills have contained provisions aimed at strengthening congressional and Pentagon oversight of spare parts prices. 

But there have also been lawmaker efforts, supported by the Aerospace Industries Association, to make it easier for defense contractors to get around certifying cost and price data.

For instance, the House’s fiscal 2025 NDAA would seek to make it simpler for defense companies to avoid such certification in certain circumstances, ostensibly in the name of streamlining acquisitions. 

The Pentagon vehemently opposes these efforts as antithetical to the interests of taxpayers and the military — and in some cases, officials have said, potentially a drag on efficient contracting. 

Dueling provisions

In a similar vein, the Senate’s draft fiscal 2025 NDAA, which could come to the Senate floor as soon as this month, would extend a pilot program to raise the dollar threshold for certified cost or pricing data for small businesses and nontraditional contractors, according to a Senate Armed Services Committee summary.

The Senate bill also would add multiyear procurements and block-buy contracts to the pilot program.

On the other hand, the House NDAA includes a floor amendment by Reps. Lloyd Doggett, D-Texas, and Ralph Norman, R-S.C., that would require the Pentagon to establish “a review panel on fair and reasonable pricing and contract oversight of sole-source contracts for munitions and weapons systems contracts, including related contracts for services and spare parts.”

The fiscal 2024 Defense appropriations law contained a mandate written by Rep. Barbara Lee, D-Calif., requiring a Pentagon report to the Appropriations committees in both chambers on the department’s efforts to crack down on contractors that have charged excessive prices for parts. It was not immediately clear if the Pentagon has submitted that report.

As this year’s defense bills wend their way through Congress, Warren, Garamendi and Pocan want the Biden administration to put the latest TransDigm acquisition under a microscope.

Their letter urged a close examination of TransDigm’s two recent acquisitions, given, they said, the company’s “merger and acquisition history, price gouging practices, and contribution to consolidation in the defense industrial base.”

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