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Is the End of the Military-Industrial Complex Nigh?

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No one would be surprised that 9/11 and the subsequent war on terror has been an amazing boon to America’s military-industrial complex, as the numbers speak for themselves – in the 10 years since 2001, the defense budget has increased an astounding 81%, reaching $698 billion in 2010.
The giant corporations that have benefited the most from this explosion of the US defense budget have been the so-called "super primes" like Northrop Grumman (NOC), Lockheed Martin (LMT), Raytheon (RTN), General Dynamics (GD) and Dow Jones (^DJI) component, Boeing (BA). Others firms like General Electric (GE) and KBR (KBR) have also profited from the defense spending explosion of the 2000s.
Raytheon, for example, brought in over $25 billion in revenue in 2010. But that figure was dwarfed by that of Lockheed, which is the Defense Department’s largest contractor in terms of sales volume. The aerospace and defense technology company’s reported revenues last year was an outrageous $46 billion, a 100% increase from $23 billion in 1995, when the US was actually winding down military spending after the Cold War. Then, 9/11 happened, and the defense budget never looked back.
The power and domination of these super-primes in the defense sector has been achieved mostly through corporate consolidation in the 1990s. Lockheed Corp. merged with Martin Marietta in 1995 to form Lockheed Martin. With its increased stature, the consolidated firm actually attempted to acquire Northrop Grumman in 1998 but its plans were thwarted as the government was concerned over the potential power of such a large firm.
All good things must come to an end though, and even though defense firms have it as good as ever currently – the 2012 US defense budget is $703 billion – their outlook is uncertain, as The Atlantic argues.

In the decade following September 2001, military spending soared and so did the fortunes of defense firms, which booked record profits, revenues, and stock prices. Procurement spending rose to more than $147 billion in 2010, nearly three times the amount for 1995.

Now, the cycle is shifting again. With the U.S. winding-down in Iraq and Afghanistan, and its domestic politics increasingly concerned with the country's debt, severe declines may be ahead for military budgets.

It's not yet clear how far defense spending will fall. The uncertainty alone is already putting enormous pressure on U.S. defense companies. The biggest are simply too large to try to merge with their peers, as they did during the 1990s, without falling afoul of regulators or investors.

The other path to growth for defense contractors is, of course, to explore new markets. But, as CNN notes, this is a dangerous path to tread on.

But selling military equipment to other countries is fraught with political pitfalls. A contract to sell some $8 billion worth of F-16 fighter jets to Taiwan has been snarled in Congress for months over concerns that it could anger the Chinese government, while the potential sale of Northrop Grumman's Global Hawk spy planes to South Korea would require the U.S. to obtain a waiver to a complicated arms treaty.

Looks like we can expect Lockheed, Boeing and the rest of the super-primes to trim their sizes significantly in the next decade to stay profitable in an era of fiscal austerity. Or perhaps defense firms can find more civilian uses for drones, such as the nascent drone journalism industry.
POSITION:  No positions in stocks mentioned.