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The Pentagon Becomes a Shareholder

The Pentagon Becomes a Shareholder

First Direct Equity Investment in Defense Supplier Signals Industrial Strategy Shift

Today: Pentagon Takes $1B Stake in L3Harris Spinoff

Overview

For three decades, the Pentagon told defense contractors to consolidate. Now it's paying $1 billion to help one spin off. The Defense Department announced it will take an equity stake in L3Harris's solid rocket motor business, which will become a separate publicly traded company later this year. It's the first time the Pentagon has directly invested in a defense supplier rather than simply buying its products.

The investment targets a chokepoint that has constrained American missile production since 2022: the solid rocket motors that propel everything from Patriot interceptors to Tomahawk cruise missiles. After decades of consolidation left only two domestic suppliers, the Pentagon is now funding capacity expansion and encouraging new market entrants—a reversal of the policy that created the bottleneck in the first place.

Key Indicators

$1B
Pentagon equity investment
First-ever direct government investment in a defense supplier's equity
2 → 4+
Solid rocket motor suppliers
New entrants Anduril and Ursa Major joining L3Harris and Northrop Grumman
600 → 2,000
PAC-3 annual production target
Interceptor missile output tripling under new seven-year agreement
51 → 5
Major defense contractors since 1993
Post-Cold War consolidation now being partially reversed

People Involved

CK
Christopher Kubasik
Chairman and CEO, L3Harris Technologies (Leading spinoff of Missile Solutions business)
MD
Michael Duffey
Under Secretary of Defense for Acquisition and Sustainment (Leading acquisition transformation strategy)
Pete Hegseth
Pete Hegseth
Secretary of War (Overseeing acquisition system transformation)

Organizations Involved

L3
L3Harris Technologies
Defense Prime Contractor
Status: Spinning off Missile Solutions as separate public company

Sixth-largest U.S. defense contractor and primary merchant supplier of solid rocket motors following the 2023 Aerojet Rocketdyne acquisition.

Northrop Grumman
Northrop Grumman
Defense Prime Contractor
Status: Expanding solid rocket motor production capacity

One of two legacy solid rocket motor suppliers, investing over $1 billion since 2018 to expand propulsion manufacturing.

DE
Department of War
Federal Agency
Status: Implementing acquisition transformation strategy

Renamed from Department of Defense in 2025, now pursuing direct supplier investments and acquisition reform.

Timeline

  1. Pentagon Takes $1B Stake in L3Harris Spinoff

    Investment

    Defense Department announces first-ever direct equity investment in a defense supplier. L3Harris will spin off Missile Solutions as public company with Pentagon as anchor investor.

  2. PAC-3 Production Tripling Agreement

    Contract

    Lockheed Martin and Pentagon sign seven-year framework to increase PAC-3 MSE interceptor production from 600 to 2,000 units annually.

  3. Hegseth Announces Acquisition Overhaul

    Policy

    Defense Secretary unveils 'Warfighting Acquisition System' strategy prioritizing speed, direct supplier relationships, and industry capital investment in capacity expansion.

  4. Pentagon Funds New Motor Suppliers

    Investment

    Defense Department awards contracts to Ursa Major, Anduril, and X-Bow Systems to expand solid rocket motor production capacity beyond legacy duopoly.

  5. L3Harris Closes Aerojet Acquisition

    Corporate

    L3Harris completes $4.7 billion purchase of Aerojet Rocketdyne after FTC declines to block the deal, consolidating solid rocket motor supply to two domestic producers.

  6. Russia Invades Ukraine

    Geopolitical

    Full-scale invasion triggers surge in global munitions demand. U.S. transfers of Javelins, Stingers, and GMLRS rockets deplete stockpiles and expose solid rocket motor production constraints.

  7. Lockheed Martin Abandons Aerojet Bid

    Regulatory

    Lockheed exits $4.4 billion Aerojet Rocketdyne acquisition after FTC lawsuit alleging the deal would harm competition among missile prime contractors.

  8. The 'Last Supper'

    Policy

    Defense Secretary Les Aspin hosts dinner with defense contractors, signaling post-Cold War consolidation. Over the next four years, the number of major defense contractors falls from 51 to 5.

Scenarios

1

Missile Solutions IPO Succeeds, Model Scales

Discussed by: Defense News, Breaking Defense, Wall Street analysts covering defense sector

L3Harris completes IPO in late 2026, Pentagon's convertible preferred shares convert to common equity, and the new company attracts additional private investment. Success leads Pentagon to replicate the model with other critical suppliers facing capacity constraints. Solid rocket motor production expands sufficiently to meet both stockpile replenishment and allied demand.

2

Congressional Pushback Slows Expansion

Discussed by: Government Accountability Office, Congressional defense appropriators, defense acquisition experts

Lawmakers question the precedent of government equity stakes in defense suppliers, raising concerns about conflicts of interest and market distortion. Appropriators attach conditions to future investments or restrict the authority. The L3Harris deal proceeds but becomes a one-off rather than a template.

3

Supply Chain Bottlenecks Persist Upstream

Discussed by: CSIS missile defense analysts, GAO supply chain studies, industry executives

Motor production expands but remains constrained by shortages of critical chemicals, specialized metals, or skilled workers. The Pentagon's investment in final assembly capacity proves insufficient without parallel investments in sub-tier suppliers. Production targets slip despite the capital infusion.

4

New Entrants Disrupt Duopoly

Discussed by: Anduril leadership, venture capital defense investors, Pentagon acquisition officials

Anduril, Ursa Major, and X-Bow scale production faster than expected using 3D printing and modern manufacturing. By 2028, the solid rocket motor market has four or five viable suppliers. The L3Harris investment accelerates rather than consolidates the market.

Historical Context

The 'Last Supper' and Defense Consolidation (1993-1997)

July 1993 - 1997

What Happened

Defense Secretary Les Aspin and Deputy Secretary William Perry gathered defense executives at the Pentagon and told them the government could no longer support the existing number of contractors. Over the next four years, 51 major defense contractors consolidated into five: Lockheed Martin, Boeing, Raytheon, Northrop Grumman, and General Dynamics. Lockheed Martin alone was built from 17 separate corporate mergers.

Outcome

Short Term

Defense companies reduced overhead, closed 14 million square feet of factory space, and passed savings to the government through lower bids.

Long Term

Consolidation created durable market power for the surviving five. Tactical missile suppliers dropped from 13 to 3. When demand surged after 2022, the shrunken industrial base couldn't scale.

Why It's Relevant Today

The Pentagon's current investment in L3Harris explicitly aims to reverse this consolidation's effects. CEO Kubasik called it 'a creative way to start unwinding a three-decade consolidation spree.'

Chrysler Bailout and Government Equity (1979-1983)

1979 - 1983

What Happened

Congress authorized $1.5 billion in loan guarantees to prevent Chrysler's bankruptcy. The government received warrants to purchase 14.4 million shares at $13 per share as compensation for the risk. Few expected the warrants to be exercised.

Outcome

Short Term

Chrysler survived and restructured under Lee Iacocca's leadership, avoiding mass layoffs in the auto industry.

Long Term

The government sold its warrants in 1983 for a profit as Chrysler's stock recovered. The bailout became a template for government intervention in distressed industries, later applied during the 2008-2009 financial crisis.

Why It's Relevant Today

The L3Harris investment differs structurally—it's proactive capacity building rather than crisis bailout—but establishes similar government-as-investor mechanics: convertible securities, minority stake, no governance control.

Post-2008 Auto Industry Government Ownership (2008-2013)

2008 - 2013

What Happened

The Treasury took a 60.8% stake in General Motors and significant positions in Chrysler, GMAC, AIG, and Citigroup as part of TARP. The government managed these stakes as temporary investments, not permanent nationalizations, and sought to exit as quickly as markets allowed.

Outcome

Short Term

GM and Chrysler avoided liquidation. The auto industry preserved roughly 1.5 million jobs.

Long Term

The government divested its GM stake by 2013 at a $10.5 billion loss. The interventions established that the U.S. would take temporary equity stakes in systemically important industries during crisis.

Why It's Relevant Today

The Pentagon's L3Harris investment extends this precedent to proactive industrial policy rather than crisis response. Officials have emphasized the investment is 'economic only' with no governance role—consistent with post-2008 practice of minimizing government involvement in management.

10 Sources:
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Breaking Defense Defense News CNBC L3Harris Technologies Lockheed Martin Federal News Network NDU Press Wikipedia Air & Space Forces Magazine Breaking Defense