2 Contractors to Cut Price on Cluster Bombs : Defense: Government says Aerojet and Alliant Techsystems conspired to eliminate competition. The firms deny it.

In an unwelcome message to the defense industry, the government announced the settlement of charges that two major ordnance manufacturers conspired to drive up the price of cluster bombs by eliminating competition.

Under a consent decree signed Wednesday, Aerojet of California and Alliant Techsystems of Minnesota agreed to cut the cluster bomb contract price by $12 million and cancel a joint venture the two firms had formed to produce the bombs.

But in a sharply worded response, Aerojet, which builds cluster bombs in Downey and Chino, rejected the government’s allegations and said the Army had approved the teaming arrangement between Aerojet and Alliant that the Justice Department later called anti-competitive.

The unusual Justice Department action, which government officials hailed as a strong message to the industry, is sure to anger major defense contractors that have already contended the government is interfering with consolidation in the shrinking industry.

“The Justice Department and the Federal Trade Commission have been very erratic about whether they are going to permit consolidation, mergers, joint ventures, partnerships and teaming,” said Herbert Fenster, a leading industry attorney.

“In some instances, mergers or consolidations go through with flying colors, while in other instances they are stopped dead and in some cases they are subject to criminal investigation,” he said.

Fenster, echoing concerns expressed throughout the industry last year, said the lack of a cohesive policy is thwarting the industry’s ability to shrink rationally in the face of a severe drop in weapons orders. He said the Defense Department has refused to provide any policy guidance on the issue to the Justice Department.

But Jamie Gorelick, the Defense Department’s special counsel, said the Pentagon is not attempting to stop mergers. Rather, she said, it is signaling that it intends to fight vigorously any anti-competitive arrangements that drive up weapons prices.

“We want to send the message that the Department of Defense will be vigilant and the Department of Justice will be firm in enforcing the antitrust laws.”

Aerojet and Alliant, the sole U.S. producers of cluster bombs, were accused of forming a team to submit a $133-million contract bid that contained $12 million in excess profit. The type of cluster bombs at issue contain 202 fist-size bombs to attack tanks and personnel.

Under the consent decree, the two firms agreed to trim about $8 million from the price of the bombs and pay a $4.1-million penalty to the government.

The government said the Army never agreed to the teaming arrangement. But the two firms sharply disputed that, saying they formed the venture in an effort to save the government money and that the Army had approved the arrangement. The Justice Department only later “argued that the Army did not have authority to approve the teaming arrangement, and Aerojet became the victim of an internal government squabble between two agencies,” Aerojet said.

Although the Pentagon has not interfered in a number of large mergers in recent years, defense executives have become increasingly concerned about the threat of antitrust actions as the pace of the industry’s consolidation quickens.

Norman Augustine, chairman of Martin Marietta Corp., said in a speech last year before the American Bar Assn. that the industry’s consolidation “will more and more come into conflict with antitrust” actions, particularly as the number of suppliers for individual weapons begins to erode.

“It simply does not make sense, under the guise of competition, to keep two suppliers in business when there is not enough business to support even one,” Augustine said. He argued that the defense industry is unique because of the government’s unusual power in the marketplace to regulate it.