Easing of Antitrust Barriers to Defense Mergers Urged : Pentagon: But task force, in rejecting an outright exemption from the law, asserts right to invoke national security.

A Pentagon task force has recommended that antitrust barriers to defense industry mergers should be relaxed, but rejected industry calls for an outright exemption from antitrust laws, according to officials familiar with a report that will be released today.

The report asserts that the Pentagon should invoke the issue of national security to protect defense industry mergers, even if those mergers might be blocked under conventional antitrust regulations.

As Pentagon spending continues to fall, the pace and size of defense mergers and acquisitions will continue to grow, creating serious new policy issues for the Pentagon, the Justice Department and the Federal Trade Commission.

The Pentagon report, written by a Defense Science Board task force, is already attracting harsh criticism both from those who assert it goes too far in advocating an accommodating posture toward mergers and from industry officials who had sought an outright exemption from antitrust rules.

“You really need an exemption if you are going to get rid of excess capacity in the defense industry,” said Donald Hicks, a Washington defense consultant and former under secretary of defense. “It is ridiculous to worry about antitrust now.”

When the government blocked a proposed merger between Olin Industries and Alliant Techsystems several years ago, advocates of a rapid industry downsizing said the action would only hurt both of the companies and set a bad precedent.

“The Department of Justice is trying to apply conventional antitrust standards to an industry in which nothing fits the conventional economic mold,” said Loren Thompson, a defense expert at Georgetown University.

In Thompson’s view, the government holds significant power over the defense industry as the sole customer for its products, and enormous financial barriers exist to other companies entering the defense market. As a result, the industry should not be treated in the same way as soft drink manufacturers or retailers, he noted.

But Daniel Brian, director of the Project on Government Oversight, said the defense industry already has enormous political power over the Pentagon and consolidation will only enhance that clout.

“The Pentagon has not been taking seriously the danger of downsizing in such a way that allows a monopoly to develop in every market sector,” Brian said. “We are going to end up with a mega corporation in every market.”

Brian’s group, which submitted written statements to the task force, also harshly criticized the make up the task force, which included defense industry attorneys and Loral Chairman Bernard Schwartz.

“It is inappropriate that Schwartz should be on the study at all,” she said, noting that Loral is one of the most active companies acquiring other contractors.