GAO

United States General Accounting Office

Report to the Chairman and Ranking 

Minority Member, Subcommittee on 

Readiness and Management Support, 

Committee on Armed Services, 

U.S. Senate

September 2000 DEFENSE TRADE

Contractors Engage in 

Varied International 

Alliances

GAO/NSIAD-00-213

Page 1 GAO/NSIAD-00-213 Defense Trade

United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-285807 Letr

September 7, 2000

The Honorable James M. Inhofe

Chairman

The Honorable Charles S. Robb

Ranking Minority Member

Subcommittee on Readiness and Management Support

Committee on Armed Services

United States Senate

Together, the United States and Europe saw defense spending decline over 

20 percent after the end of the Cold War. As the Department and Ministries 

of Defense purchased fewer weapon systems, defense companies on both 

continents looked increasingly to each other’s market for additional sales. 

To gain political advantage when competing in the other’s market, U.S. and 

European contractors began forming transatlantic business alliances. To 

better understand these alliances, we surveyed four large U.S. contractors, 

reviewed four weapon system programs being executed by two of these 

contractors, and studied three foreign-owned U.S. companies. We used the 

results of our review to address your questions regarding (1) the types of 

alliances companies are establishing and their reasons for forming 

alliances; (2) why companies prefer certain types of alliances over others; 

and (3) whether U.S. laws, regulations, policies, and practices influence a 

company’s decision to form an alliance or its choice of a type of alliance. 

Results in Brief U.S. and European defense companies create teams, joint ventures, and 

subsidiaries and sometimes merge with or acquire one another in order to 

compete worldwide for the sale of military weapon systems. Generally, two 

or more companies form a team by negotiating an agreement to work 

together to pursue a particular government procurement, with one 

company acting as the primary contractor and others as subcontractors. In 

contrast, a joint venture is typically a separate legal entity, either a 

partnership or a corporation, that two or more companies form to pursue a 

discrete market. A subsidiary is different from both a team and a joint 

venture because it is wholly owned by one company and is physically 

located in another country so that it may pursue that country’s defense 

business. Defense companies form these alliances and subsidiaries to 

access and increase their competitiveness in other markets. 
B-285807

Page 2 GAO/NSIAD-00-213 Defense Trade

Large U.S. companies prefer to engage in flexible alliances whenever 

possible. U.S. defense contractors said they prefer teams to other alliances 

because teaming allows companies to choose new partners in each market 

in which they wish to compete, increase company capabilities without 

forming permanent relationships, and access unique technology needed to 

meet military requirements. However, European governments are not 

always receptive to teams because they perceive them as alliances led by 

U.S. companies using U.S. technology that consign European participants 

to a subsidiary role. Companies that want to satisfy European 

governments’ desire for greater industrial participation form joint ventures 

in which companies share risk, decision-making, work, and, to the extent 

their governments will allow, technology. However, U.S. companies see 

significant disadvantages with joint ventures because the U.S. government 

often abandons multilateral programs before completion and all 

governments supporting the joint venture make decisions that adversely 

affect its operational efficiency, such as directing the companies to divide 

work according to each country’s investment rather than according to each 

company’s skills.1

 Subsidiaries are not a favored approach because in the 

fragmented European market a subsidiary in one country has no impact on 

market access in another country. Neither have large U.S. defense 

companies favored merging with or acquiring major European defense 

companies.2

 One company said that it has not pursued such combinations 

because they would be unlikely to reduce operating costs since large nonrecurring costs would be incurred in moving sizable manufacturing 

facilities and there would likely be political opposition to such a move. 

However, European acquisitions of small and medium U.S. defense 

companies are common because they provide access to the U.S. defense 

market, which is the world’s largest. As of April 2000, 26 of the largest 

foreign defense companies own 197 U.S. subsidiaries engaged in the U.S. 

defense market, according to Department of Defense records.3

Companies we reviewed do not consider the U.S. legal and regulatory 

environment to be a major impediment to forming an alliance or a principal 

1

Governments take these actions when the joint venture is formed to execute a 

government-to-government cooperative program.

2

Little data is available on the number of European companies that U.S. companies have 

merged with or acquired. 

3

According to an official in the Office of the Secretary of Defense, the office estimated the 

largest foreign defense companies based on each company’s reported sales dollars.
B-285807

Page 3 GAO/NSIAD-00-213 Defense Trade

determinant of the type of alliance chosen. However, U.S. companies are 

concerned with the effect a slow technology transfer process can have on 

the operation of an alliance and with the effect that a regulation that 

requires foreign governments to seek U.S. consent before transferring 

purchased alliance products to third parties may have on future alliance 

sales. 

In written comments on a draft of this report, the Department of Defense 

agreed with our findings.

Background Between the end of the Cold War and fiscal year 2000, the U.S. government 

reduced the Department of Defense research and development and 

procurement annual budgets by about $60 billion. In response to decreased 

demand in the U.S. defense market, U.S. defense companies consolidated, 

merged with other companies, and sold off less profitable divisions and 

business segments unrelated to the company’s core competency. For 

example, today in the United States there are 5 large defense companies 

that in 1990 were 33 separate businesses. In addition to consolidating, 

companies are placing greater emphasis on international sales to make up 

lost revenues. 

European companies, also faced with their governments’ declining defense 

spending, began forming alliances within Europe, in part, to gain access to 

other countries’ defense markets. As companies merge and establish

long-term joint ventures for product development, it becomes increasingly 

difficult to keep track of the multiplicity of relationships. Figure 1 provides 

a snapshot of one European company’s complex shareholder structure.
B-285807

Page 4 GAO/NSIAD-00-213 Defense Trade

Figure 1: Shareholder Structure of the European Aeronautic Defense and Space Company

a

SEPI is a Spanish state-owned industrial holding company.

Source: French Armament Procurement Agency, Ministry of Defense.

To access defense markets in Europe, U.S. companies have learned that 

they have to involve European countries’ defense companies in the 

production of items being sold. This involvement allows European 

governments to build public support for the purchases. Governments 

leverage their weapon acquisitions to preserve defense jobs and make their 

defense companies more competitive in the global market by structuring 

competitions so that work sharing and technology transfer are competitive 

discriminators.

Initially, European governments required offsets that created or preserved 

jobs in return for purchasing weapon systems produced outside of their 

home country.4

 An offset could be directly related to the weapon system 

34.43% 65.57%

45.75% 8.50% 45.75%

50% 37% 13%

French

Government

French

Government Lagardere Lagardere Private French

Institutions

Private French

Institutions SEPI SEPI DaimlerChrysler

DaimlerChrysler

French

Pooling Company

French

Pooling Company

Public Public Holding

Dutch Partnership

Holding

Dutch Partnership

EADS

European Aeronautic Defense and Space Company

Dutch NV

EADS

European Aeronautic Defense and Space Company

Dutch NV

a

4

Offsets are commercial or industrial benefits that a company offers a foreign government 

as an inducement or condition for the purchase of military goods or services. See Defense 

Trade: European Initiatives to Integrate the Defense Market (GAO/NSIAD-98-6, Oct. 29, 

1997).
B-285807

Page 5 GAO/NSIAD-00-213 Defense Trade

being purchased,for example, buying parts for the weapon system from 

companies in the purchasing government’s country. But offsets could also 

be assisting the country’s commercial businesses with marketing their 

products or helping the country develop its infrastructure. Offsets are still 

common today and, in some cases, have resulted in European companies 

becoming long-term suppliers to U.S. contractors. 

European countries spend far less than the United States on research and 

development. For example, in 1997, the United States spent $32.2 billion on 

defense research and development compared with the combined spending 

of France, Germany, Italy, and the United Kingdom of $7.1 billion. 

Therefore, larger European countries have come to want more from 

U.S.-European business alliances than workshare. They also want 

technology that will make their defense companies more competitive in the 

global marketplace. Technology transfer is widely used to fulfill offset 

obligations and may be a key factor in a country’s acquisition decisions. It 

provides European governments with a technology infusion that enables 

their companies to produce more advanced weapon systems for the export 

market, which is responsible for a significant portion of some countries’ 

defense industry sales.

Many governments on both continents are increasingly showing support 

for transatlantic alliances. On February 5, 2000, the U.S. Department of 

Defense and the United Kingdom Ministry of Defense signed a Declaration 

of Principles in support of defense industry integration, and the 

Department of Defense is in discussion with other European countries on 

this subject. Because the United States expects to fight jointly with its 

North Atlantic Treaty Organization allies in future conflicts, it wants to 

ensure that each country’s military forces bring compatible equipment to 

the battle. The Department of Defense believes that the best way to ensure 

that U.S. and allied equipment can work together is to have U.S. and 

European defense companies jointly develop weapon systems. If U.S. and 

European governments also jointly fund development programs, each 

country’s weapon system costs should also decline because each would be 

responsible for only a portion of total development costs. In addition, 

Department officials believe that close ties between U.S. and European 

defense companies ensure companies access to each other’s defense 

market.

Defense companies must consider various statutes, regulations, and other 

legal requirements when considering transatlantic alliances. Among other 

things, these laws, regulations, and other legal requirements are meant to 
B-285807

Page 6 GAO/NSIAD-00-213 Defense Trade

ensure fair competition, establish a preference for or require use of a 

domestic source, regulate imports and exports, and protect national 

security. Table 1 lists important U.S. statutes, regulations, and other legal 

requirements and briefly explains the purpose of each.

Table 1: Statutes, Regulations, and Other Legal Requirements Affecting Transatlantic Alliances

Laws and implementing 

documents Primary purpose

Antitrust Laws

• Clayton Act

• Hart-Scott-Rodino Act

• Sherman Act

These laws:

• Require parties to large mergers to report their plans to the Federal Trade Commission and the Antitrust 

Division of the Department of Justice;

• Prohibit acquisitions that substantially lessen competition or tend to create a monopoly; and

• Prohibit acquisitions, mergers, and joint ventures that cause unreasonable restraints of trade or 

monopolize a market. 

Domestic Source Laws

• Buy American Act 

• Berry Amendment

• Other statutory 

restrictions

These acts either establish a preference or a requirement for acquiring domestic articles, supplies, and 

materials for public use.

Import/Export Laws and 

Regulations

• Arms Export Control Act 

• International Traffic in 

Arms Regulations

• Export Administration Act 

• Export Administration 

Regulations

These acts and regulations control the import and export of military goods and services and goods that may 

have both commercial and defense uses. 

• The Arms Export Control Act establishes U.S. policy that allows international programs and projects for 

cooperative exchange of data, research, development, production, procurement, and logistics support to 

achieve specific national defense requirements and objectives of mutual concern. The act also established 

the need for export regulations that reduce the international trade in weapons and lessen the danger of 

regional conflicts. 

• The International Traffic in Arms Regulations define the type of defense articles and services that require 

the Department of State’s approval for export, the entities that may request such approval, the general 

policies and procedures related to exports, and the criminal penalties for failing to comply with the 

regulation.

• The Export Administration Act implements the U.S. government’s export control licensing and enforcement 

system for goods that may be used for both commercial and defense purposes. Although the Export 

Administration Act expired in 1994, the export control process under that act continues under the authority 

of an executive order.

• The Export Administration Regulations implement the Export Administration Act. 
B-285807

Page 7 GAO/NSIAD-00-213 Defense Trade

Source: GAO analysis of U.S. statutes, regulations, and other legal requirements affecting transatlantic 

alliances.

U.S.-European 

Company Alliances Are 

Varied

Our survey and case studies show that defense companies are engaging in 

various types of alliances to gain transatlantic market access and become 

more globally competitive. Six of the seven companies in our study are part 

of project-based teams, joint ventures, subsidiaries, or mergers and 

acquisitions, while a representative of the seventh said that the company 

recently signed an agreement with a European company that provides for 

teaming when opportunities arise. Large U.S. contractors said that when 

they compete for business in foreign markets, they form the type alliance 

that is most likely to result in market access and yield the greatest return 

on their investment. Officials from European-owned U.S. companies told 

us that European companies purchase U.S. defense companies to acquire 

new product lines, capabilities, and advanced technology that enhance 

access to the U.S. defense market. Table 2 displays the number of teams, 

joint ventures, and subsidiaries in which the three large U.S. contractors 

included in our review that established alliances and subsidiaries are 

engaged. 

National Security Legal 

Restrictions on 

Acquisitions and Mergers

• Executive Order 11858

• Exon-Florio Amendment

• National Industrial 

Security Program 

Operating Manual

• Together the Executive Order and Amendment establish the interagency Committee on Foreign 

Investment in the United States and give the President the power to act upon the Committee’s 

recommendations. The Committee is responsible for reviewing the voluntary notices of foreign companies 

that intend to merge with, acquire, or take over U.S. companies and submitting to the President any 

recommendations that a foreign company suspend or abandon its purchase of a U.S. firm. The President 

is empowered to act upon Committee recommendations and may also order the divestiture of a foreign 

company’s ownership in a U.S. company. 

• The Manual prescribes requirements, restrictions, and other safeguards necessary to prevent 

unauthorized disclosure of classified information released by U.S. government Executive Branch 

departments and agencies to their contractors. It provides that before a foreign-owned company may 

access classified information, measures must be taken as necessary to remove the possibility of 

unauthorized access or adverse effect on classified contract performance by a foreign owner. The level of 

access granted without restrictions depends on the type of mitigation employed to offset foreign ownership, 

control, or influence. Foreign-owned U.S. firms operating under a trust or proxy agreement do not have any 

access limitations, while firms operating under a special security agreement can access information above 

the secret level only if the government contracting activity prior to the award of a classified contract 

determines that it is in the national interest to allow the firm access to such information.

(Continued From Previous Page)

Laws and implementing 

documents Primary purpose
B-285807

Page 8 GAO/NSIAD-00-213 Defense Trade

Table 2: Reported U.S.-European Alliances of Three Large U.S. Defense Contractors

a

This number is an estimate rather than a precise count because one contractor said that his company 

does not maintain a centralized database that includes all teams of which the company is a part. 

b

Incorporated marketing offices are not included as subsidiaries.

Source: GAO analysis of contractor data.

Contractors Value 

Flexibility

Large U.S. contractors said that they prefer to engage in alliances that give 

them maximum flexibility. However, the companies said that to access 

certain markets or compete for certain procurements they must sometimes 

engage in less flexible linkages.

Contractors Find Teaming 

Most Advantageous

Teaming offers more flexibility than other types of alliances. Because 

teaming agreements are negotiated, they may contain any provisions to 

which the parties can agree. Prime contractors said they often try to limit 

the life of the team to an individual procurement because if a contractor 

wants to sell its product in more than one market, it gains an acquisition 

advantage by choosing different subcontractors in each of the markets. 

Teaming is also a way of temporarily adding capabilities that make a 

company more competitive. One large U.S. contractor said that teaming 

with a European company with product expertise different from its own 

allows it to compete for sales in parts of the U.S. market in which it is not a 

leader without making an investment to acquire that capability. Another 

said that governments sometimes require capabilities in their weapon 

systems that only one company can deliver. For example, the U.S. Army 

requires that the computer system being developed for a reconnaissance 

vehicle that it and the United Kingdom are jointly funding be able to 

communicate with computer systems of command vehicles. Only one 

company possesses this technology; as a result, the joint venture initiated a 

nonexclusive teaming arrangement with the company.5

 

Teams Joint ventures Subsidiaries

Number of reviewed companies engaged 

in this type alliance

3 32

Aggregate number of alliances formed by 

these companies

115a 26 3b

5

Teaming agreements may be exclusive or nonexclusive. An exclusive agreement precludes 

the teaming partners from joining with other contractors to pursue the same procurement.
B-285807

Page 9 GAO/NSIAD-00-213 Defense Trade

However, according to the Department of Defense, teaming arrangements 

are not always acceptable to European governments and companies. At a 

time when European governments are insisting on performing a larger 

portion of a program’s work and sharing more U.S. technology, a 

Department official said European governments and their contractors are 

less receptive to alliances in which U.S. companies lead programs, thereby 

retaining most U.S. technology, and relegate European participants to 

subcontractor status. 

U.S. Defense Companies 

Find Joint Ventures Less 

Attractive

U.S. and European companies may form joint ventures when their 

governments are jointly procuring a weapon system and want their 

countries’ contractors to work together as partners to develop and/or 

produce the system. U.S. companies also engage in transatlantic joint 

ventures to gain an advantage when competing for European acquisitions. 

Joint ventures are advantageous because governments see them as a way 

that companies can work together as equals, sharing jobs and technology. 

However, contractors said government actions sometimes make joint 

ventures less attractive alliances.

Unlike a team, a joint venture typically does not place one company in a 

leadership position. Instead, the companies share risks and assets in joint 

pursuit of a discrete market, often a specific weapon system program. We 

studied two joint ventures that companies formed because their 

governments wanted one to cooperatively develop and produce an air and 

missile defense system and another to develop a reconnaissance vehicle. 

U.S. and European governments are jointly funding both systems. In these 

joint ventures, the participants share decision-making, program risks, 

technology (to the extent allowed by individual governments), and 

program work. Representatives of one U.S. company that is located in the 

United Kingdom said that United Kingdom joint ventures are likely to be 

more common in the future because the government is moving toward 

having one contractor support a system from cradle to grave. The 

representatives said that this concept requires a contractor to make a large, 

long-term capital investment in facilities, equipment, and personnel, and 

companies will likely want to form joint ventures to share these risks. 

Contractors said joint ventures are not the most advantageous transatlantic 

linkage because the U.S. government often abandons programs that the 

ventures support before completion and U.S. and European governments 

often decide which companies should form a joint venture, as well as 

requiring that their companies’ work share equal their country’s program 
B-285807

Page 10 GAO/NSIAD-00-213 Defense Trade

investment. Of the two programs in our study executed by joint ventures, 

the Department of Defense has decided not to provide future funding for 

one and did not plan long-term funding for the second until the program 

had been in place for 3 years. Joint venture contractors also told us that 

companies work together best if they are allowed to decide who will 

compose an alliance because they look for partners that complement their 

capabilities. Companies also want to decide what percentage of work each 

participant will perform so that work may be allocated efficiently. One 

contractor representative said that, when a joint venture must ensure that 

each country receives work share equal to its investment, work cannot 

always be assigned to the company best able to perform the tasks. 

U.S. Companies Establish 

Few European Subsidiaries

Of the four large U.S. defense companies in our sample, two have 

subsidiaries in Europe. We reviewed one subsidiary established in the 

United Kingdom by each company. Representatives of these subsidiaries 

said that because of their permanent presence and the number of local 

citizens they employ, they are better able to compete with the United 

Kingdom’s large contractors. However, being located in the United 

Kingdom does not guarantee that a subsidiary will be treated more 

favorably in all respects than other foreign sellers. In addition, contractors 

said that because the European defense market is fragmented, establishing 

subsidiaries is not always an efficient use of capital.

In some regards, subsidiaries are treated no differently than other foreign 

companies. For example, the United Kingdom treats foreign-owned 

subsidiaries as it does all other foreign sellers in regard to offsets. The 

United Kingdom’s policy is that any company selling defense goods to the 

United Kingdom must provide an offset if the goods being sold include 

components valued at more than about $15 million that are not produced in 

the United Kingdom. Therefore, if a subsidiary does not plan local 

production of a substantial portion of a weapon system that the United 

Kingdom is purchasing, it must subcontract work to United Kingdom 

defense companies, transfer technology, or perform some other defense 

activity that benefits the government.

Contractors said that it is sometimes difficult to make a good business case 

for establishing a subsidiary. Because Europe is made up of many different 

countries, each with its own defense budget and acquisition process, a 

subsidiary in one country does not ensure access to the defense markets of 

other countries. The contractors told us that if a country’s defense budget 

is small and potential profits from likely sales are limited, or if product 
B-285807

Page 11 GAO/NSIAD-00-213 Defense Trade

pricing is dependent upon large infrastructures, as in the aircraft industry, a 

subsidiary is likely not feasible. 

Transatlantic Mergers and 

Acquisitions 

A complete picture of the status of U.S. and European mergers and 

acquisitions cannot be drawn because little data is available on the number 

of European defense companies that U.S. companies have acquired as 

subsidiaries.6

 But available data shows that no large U.S. and European 

defense contractors have merged or acquired one another7

 and foreign 

acquisitions of smaller U.S. contractors are common. 

Large U.S. companies in our sample cited several obstacles to mergers and 

acquisitions among large U.S. and European defense contractors. One 

contractor said that despite over-capacity on both sides of the Atlantic 

consolidation of manufacturing operations does not appear practical 

because of the large nonrecurring cost of moving work and the political 

opposition such a move would create. This contractor also said that the 

complex interlocking ownership structure of European companies makes 

it difficult for a U.S. company to reduce costs through consolidation 

because the European companies have negotiated and contracted work 

share and established long-term supplier relationships for most products. 

Other contractors pointed out that U.S. antitrust laws would likely prevent 

consolidations of large U.S. and European contractors because the size of 

consolidated companies would give them a competitive advantage. Finally, 

a representative of one contractor said that his company is not financially 

able to acquire European companies and is not interested in being 

acquired.

Acquisitions Enable Entry 

Into World’s Largest 

Defense Market

Records maintained by the Office of the Secretary of Defense show that, as 

of April 2000, 26 of the largest foreign defense companies own 197 U.S. 

subsidiaries engaged in the U.S. defense market. Purchasing U.S. 

companies is advantageous because it increases the European owners’ 

6

A Department of Defense representative said the Department could use its contract 

database to develop a partial list of U.S. subsidiaries in Europe. However, the list would be 

limited to subsidiaries to whom the Department awarded contracts with a value of 

$25,000 or more over the last 5 years. 

7

Although no mergers or acquisitions have occurred between large U.S. and European 

defense companies, at least one large U.S. company is considering selling one of its 

divisions to a European buyer. 
B-285807

Page 12 GAO/NSIAD-00-213 Defense Trade

access to the largest defense market in the world by providing them with 

new and profitable product lines and increased capability. Access to U.S. 

funded technology and acquisition programs are also powerful incentives 

driving this trend of foreign acquisitions. But purchases can be expensive 

and, in some cases, market access is limited. 

Our case studies show that European companies often enter or expand 

sales in the U.S. market by acquiring a U.S. defense company. A foreign 

company principally involved in food processing and real estate 

investments acquired a U.S. company that is a diversified manufacturer of 

commercial and defense products and a leader in certain niche markets. 

The acquisition provided the European buyer with an entirely new 

endeavor and new market. In another case study, a foreign company 

acquired a U.S. electronics company that complemented its systems 

integration capabilities, expanded its market, and provided more of a 

presence in the United States. The acquirer expects that the synergies 

between the companies will allow it to obtain a leadership position in the 

aerospace and defense industry. 

Our study also shows that a European company may access U.S. 

technology and eliminate competitors in the global market through the 

acquisition of U.S. companies. For example, through one case study we 

found a European company that acquired two U.S. companies 

manufacturing a product that is critical to U.S. national security, closed 

their operations, and moved specialized hardware and software to the 

European company’s facilities. According to Department officials, these 

actions allowed the European company to narrow the U.S. technological 

lead in this product, which reduced its competition in the world market. 

Industry experts also said the foreign company obtained unique technology 

from one of the acquired companies that enabled it to win a recent U.S. 

military contract over its remaining U.S. competitor. In addition, the foreign 

company later acquired another U.S. company manufacturing a similar 

product and moved that company’s operation to Europe.8

 These actions, 

according to Department officials, allowed the European company to 

narrow the technological lead that the United States held in this product. 

8

The European company acquired this U.S. company after the Congress enacted the ExonFlorio Amendment to the Defense Production Act in 1988. The European buyer voluntarily 

notified the Committee on Foreign Investment in the United States of its intended 

acquisition of the U.S. company and stated in the notification that the business might be 

moved to Europe. The Committee did not recommend to the President that this acquisition 

be suspended. 
B-285807

Page 13 GAO/NSIAD-00-213 Defense Trade

Even though foreign acquisitions of smaller U.S. companies are common, 

our sample shows that such consolidations can be expensive because 

foreign companies pay large sums of money to acquire U.S. companies and 

incur additional legal fees to transfer company ownership and comply with 

U.S. laws. Table 3 shows the approximate cost in then-year dollars of the 

foreign acquisitions of U.S. companies in our review.

Table 3: Reported Foreign Acquisition Costs of Selected U.S. Defense Companies

a

One company that we selected as a case study was acquired by a foreign company that was in turn 

acquired by another foreign company. Therefore, we reviewed two acquisitions for one of the case 

studies.

b

Legal fees include fees for filing with the antitrust review authorities and with the Committee on 

Foreign Investment in the United States, if applicable. 

c

This acquisition did not undergo an antitrust review or a review by the Committee on Foreign 

Investment in the United States.

d

According to a company executive, the company’s records do not separate legal fees from other 

transfer costs. Total transfer costs were approximately $158 million and included legal fees, investment 

banker fees, consultant fees, and other costs.

Source: GAO analysis of contractor data.

Although purchasing a U.S. defense company enhances market access, it 

does not ensure full access to the U.S. defense market. Department of 

Defense policy does not allow foreign-owned U.S. defense companies to 

execute contracts that require access to information above the secret level 

unless the government contracting authority determines that the release of 

such information advances U.S. national security interests and the owners 

of the information approve its release. This policy prevented a United 

Kingdom-owned U.S. company in our sample from bidding on Navy and Air 

Force contracts worth in excess of $123 million. 

Dollars in millions

Acquisitiona Purchase cost Legal feesb

#1 $5 $0.085c

#2 704 3.000

#3 1,100 2.000

#4 10,000 d
B-285807

Page 14 GAO/NSIAD-00-213 Defense Trade

U.S. Laws Are Not 

Determinants in 

Establishing Alliances 

U.S. companies in our sample said U.S. laws and regulations are neither the 

principal determinant of whether they form an alliance nor the reason one 

type of alliance is chosen over another. Rather, the companies regard the 

legal and regulatory environment that the United States has designed to 

protect national security and foreign policy interests as a cost of doing 

business. However, companies said these laws, regulations, and policies 

may increase the complexity of establishing an alliance, increase start-up 

and operational costs, impact an alliance’s ability to operate efficiently, and 

prevent the synergy expected from a business consolidation. 

Compliance Increases 

Complexity and Costs

To meet the requirements of antitrust laws and to prevent future reviews or 

a directed divestiture for national security reasons, many alliances provide 

antitrust agencies and the Committee on Foreign Investment in the United 

States with substantial amounts of information regarding their intended 

alliances. Foreign-owned U.S. defense companies in our sample said 

gathering this information requires a significant amount of time and 

increases start-up costs. However, according to a Department of Justice 

official, antitrust laws have not stopped any foreign and U.S. companies 

from forming alliances and records show that the President at the 

recommendation of the Committee has only prohibited one foreign 

company from purchasing a U.S. defense company.9

 Because companies 

combine all legal fees in their financial records, only one company in our 

study was able to approximate the cost of filing these antitrust and national 

security documents. It estimated that it expended about $400,000 to 

prepare information for the consideration of the Committee on Foreign 

Investment in the United States and about $100,000 to prepare information 

for antitrust agencies. Neither the antitrust agencies nor the Committee 

required the company to provide additional information that would have 

increased costs. 

9

A number of potential mergers or acquisitions have been withdrawn or restructured during 

the course of a review by the Committee on Foreign Investment in the United States. In 

addition, in one case a foreign company agreed to voluntarily divest a U.S. company already 

acquired.
B-285807

Page 15 GAO/NSIAD-00-213 Defense Trade

Foreign-owned U.S. companies also said that preventing foreign owners 

from using their ownership to obtain unauthorized access to exportcontrolled and classified technology, as required by the National Industrial 

Security Program Operating Manual, is a continuing expense. Companies 

reported that costs for security personnel, record keeping, Board of 

Directors fees and meeting expenses, and legal fees necessary to protect 

U.S. technology from disclosure range from about $31,000 to $295,000 per 

year.10

Technology Transfer and 

Restrictions Slow 

Operations and Affect Sales 

Most alliances in our sample view technology transfer laws, regulations, 

and policy as exacting a higher cost than other elements of the legal and 

regulatory environment on an alliance’s operation. Joint ventures, 

subsidiaries, and teams, which execute programs that depend upon sharing 

U.S. technology, expressed concern with the time that it takes the U.S. 

government to approve the export of technical data to foreign companies 

that participate directly or indirectly in the alliance. Subsidiaries also 

expressed concern with the effect retransfer restrictions could have on 

future sales in the market they were established to access. 

Before a U.S. company participating in an alliance can share with the 

alliance’s foreign participants many technologies owned by the U.S. 

government or the company, it must, according to the International Traffic 

in Arms Regulations, obtain approval of a technical assistance agreement 

from the State Department. The agreement identifies the U.S. technology 

that the U.S. government is willing to allow the parties to the agreement to 

share. Because many programs being executed by transatlantic alliances 

are leveraging U.S. technology, work is slowed or cannot begin until the 

State Department approves the agreement. Table 4 displays data provided 

by contractors on the length of time that the State Department required 

before approving technical assistance agreements for programs included in 

our sample. 

10All companies executing classified contracts incur continuing expenses for security 

personnel. However, foreign-owned U.S. companies may incur additional expenses because 

the National Industrial Security Program Operating Manual requires each company to 

establish a permanent committee of its Board of Directors, known as the Government 

Security Committee, to ensure that the company maintains policies and procedures to 

safeguard export controlled and classified information with which it is entrusted. The 

Manual further requires the appointment of a Technology Control Officer and the 

development and approval of a Technology Control Plan.
B-285807

Page 16 GAO/NSIAD-00-213 Defense Trade

Table 4: Average Days Required for State Department Approval of Technical 

Assistance Agreements as Reported by Contractors

Note: Only three of the programs that we reviewed required technical assistance agreements. The 

fourth program required a manufacturing license that the State Department approved in 95 days.

a

Changes may include adding or deleting parties with whom data may be exchanged or changing the 

scope of the data that may be shared.

Source: GAO analysis of contractor data.

The time the United States requires to export technology is even greater if 

an alliance needs access to government-owned rather than 

company-owned technology. Department of Defense Directive 5230.11, 

which implements U.S. policy for the disclosure of classified military 

information to foreign governments and international organizations, and 

Directive 2040.2, which regulates the international transfer of technology, 

goods, services, and munitions, require the Department of Defense to 

review government-owned classified and export-controlled unclassified 

information and approve its release to foreign parties.11 A joint venture in 

our sample reported that during the 27 months after the State Department 

approved its request for a technical assistance agreement, the Department 

of Defense required an average of 131 days per document to make a 

disclosure decision.12 Department of Defense foreign disclosure officials 

said the decision process was lengthy because (1) the joint venture 

requested a large number of documents, many of which were sensitive; 

Average approval time for

basic agreement

Average approval time required to

change a basic agreementa

Program 1 107 70

Program 2 95 Not reported

Program 3 74 58

11The National Security Decision Memorandum formulates U.S. national policy governing 

decisions on the disclosure of classified military information to foreign governments and 

international organizations. The Memorandum is implemented by National Disclosure 

Policy-1, an interagency document, that is implemented within the Department of Defense 

by Directive 5230.11. However, the National Disclosure Policy does not regulate the 

disclosure of six classes of information. Other national disclosure policies determine the 

release of national intelligence data, counterintelligence operational information, 

communications security information, nuclear information, sensitive compartmented 

information, and strategic planning and guidance. Other national committees or U.S. 

government officials make disclosure decisions on these classes of information. 

12The average release time does not include consideration of documents for which decisions 

were pending or documents whose release the Department denied.
B-285807

Page 17 GAO/NSIAD-00-213 Defense Trade

(2) the joint venture failed to provide all required information when 

requesting data; (3) reviews of requested information by its owners were 

sometimes lengthy; and (4) the Department did not provide officials with a 

Technology Assessment/Control Plan13 that it requires be used as the basis 

for foreign disclosure decisions.

Subsidiaries also expressed concern that retransfer restrictions that the 

U.S. government places on weapon systems sold to foreign governments 

may reduce the subsidiary’s ability to compete for future business in the 

European market. The U.S. International Traffic in Arms Regulations 

require recipients receiving U.S. exports of all defense articles and services 

to obtain the written approval of the U.S. Department of State before 

transferring those articles and services to third parties. Representatives of 

subsidiaries said that this regulation sometimes prevents them from 

successfully competing with European firms. For example, one large U.S. 

company with a subsidiary in the United Kingdom that competed to 

develop and produce an air-to-air missile for the United Kingdom believed 

that it could not be competitive with European companies unless it 

received relief from this regulation. Because the United Kingdom plans to 

sell the selected missile as the munition on an aircraft that it is 

manufacturing and will export to other countries, a retransfer restriction 

would require the United Kingdom to seek U.S. permission each time it 

wants to sell the aircraft. In cases such as this, the Department of Defense 

sometimes agrees in writing to allow the resale of the item in question, in 

this case the missile, to a select group of countries. However, because 

exports are under the control of the State Department, the Department of 

Defense can only provide firm assurance that it will not oppose disclosure 

of the incorporated technology to the named countries, not that the State 

Department will agree to allow the missile to be resold to the countries.

Synergy Not Always 

Attainable

Companies in our sample said technology policy has the potential to 

prevent or diminish the synergy that alliances expect from business 

combinations. A foreign-owned company in our sample and its parent that 

produce similar military items want to share their knowledge and 

expertise. However, because it is Department of Defense policy to prevent 

13A Technology Assessment/Control Plan itemizes all sensitive U.S. classified and 

unclassified articles, commodities, or technical data that may be transferred under a 

proposed international agreement, assesses the risk to U.S. national security of such 

transfers, and identifies the foreign technologies that the United States is likely to acquire as 

a result of a proposed agreement.
B-285807

Page 18 GAO/NSIAD-00-213 Defense Trade

foreign owners from using their ownership to obtain unauthorized access 

to export-controlled and classified technology, the two companies find it 

difficult to learn from one another and often find themselves in 

competition. Similarly, representatives of a joint venture that is leveraging 

U.S. government-owned technology said that some of the technology the 

United States released to the joint venture is restricted to U.S. access only. 

The representatives said that because this restriction prevents the free flow 

of information it undermines the functioning of the joint venture’s 

U.S.-European contract teams. However, another company in our sample 

realizes synergy without sharing export-controlled or classified data. A 

representative of a United Kingdom company said that its purchase of a 

U.S. company will boost operating performance and competitiveness 

through the synergies and opportunities available to the combined 

companies. The combination builds on the U.S. company’s cost 

management and financial control skills and the United Kingdom 

company’s large-scale project management and systems integration skills. 

Conclusions The U.S. and European defense companies that we reviewed are trying to 

maintain flexibility so as to increase their sales in a market that has seen 

little to no growth globally. Their goal is to seek alliances that best increase 

their ability to sell products to other governments. In this dynamic 

environment, the U.S. companies have preferred alliances, such as teams, 

that they can easily abandon should the alliance be unsuccessful in 

competing for new business or should an alliance with other companies 

offer greater potential for increased sales and revenues. Foreign companies 

included in our review, seeking to increase their share of the largest 

defense market in the world—the U.S. market—have been willing to 

establish a more permanent presence. As these U.S. and European 

companies focus on quickly gaining market share, they are more willing to 

test different types of alliances. While the companies we reviewed do not 

consider the U.S. legal and regulatory environment to be the driver in their 

choice of an alliance, they do find that some laws and regulations, 

particularly those related to technology transfer, affect an alliance’s 

operation. However, in this rapidly changing environment, it is difficult to 

determine the full effect U.S laws, regulations, policies, and practices may 

have on future linkages.
B-285807

Page 19 GAO/NSIAD-00-213 Defense Trade

Agency Comments and 

Our Evaluation

The Department of Defense agreed with a draft of this report and provided 

technical comments. The Department’s written comments are reprinted in 

appendix I. The Department’s technical comments have been incorporated 

as appropriate. 

Scope and 

Methodology

We examined the integration of the U.S. and European defense industries 

by surveying four large U.S. defense contractors, examining four programs 

two of these companies are executing, and studying three foreign-owned 

U.S. companies. We cannot statistically state that the conditions we found 

in our review apply to all U.S. and European industry alliances. However, 

our aim was not to project our findings to the universe of transatlantic 

alliances, but to illuminate trends in today’s changing business 

environment. To further ensure that these trends are representative, we 

discussed them with Department of Defense officials tracking transatlantic 

linkages and an industry expert familiar with today’s business landscape. 

We judgmentally selected contractors that are included among the largest 

diversified U.S. defense companies and programs that are executed by 

various types of transatlantic alliances, including joint ventures, teams, and 

subsidiaries. The three foreign-owned U.S. companies were judgmentally 

selected to include different technologies and various European countries. 

We did not audit financial or licensing data provided by companies or 

programs and cannot attest to its accuracy. 

To determine the types of alliances formed between U.S. and European 

defense companies, the impetus for forming these alliances, companies’ 

reasons for choosing certain types of alliances over others, and the 

influence that the U.S. legal and regulatory environment has on decisions to 

form alliances, we analyzed survey responses and information collected 

from defense companies included in our review. We also analyzed U.S. 

laws, regulations, and policies to determine how they might affect 

transatlantic linkages and compared our results to the companies’ 

responses and documentation. 

To accomplish our analysis, we held discussions with and collected 

information from the Office of the Under Secretary of Defense for 

Acquisition, Technology, and Logistics, Washington, D.C.; Office of the 

Under Secretary of Defense for Policy, Washington, D.C.; Office of the 

Assistant Secretary of Defense for Command, Control, Communications, 

and Intelligence, Washington, D.C.; Defense Security Service, Alexandria, 
B-285807

Page 20 GAO/NSIAD-00-213 Defense Trade

Virginia; Defense Threat Reduction Agency, Arlington, Virginia; Defense 

Intelligence Agency, Washington, D.C.; National Ground Intelligence 

Center, Charlottesville, Virginia; Army Counterintelligence Center, Fort 

Meade, Maryland; Department of Defense General Counsel, Washington, 

D.C.; U.S. Department of Justice, Washington, D.C.; Defence Export 

Services Organisation, Ministry of Defence, London, England; and the U.S. 

Embassy, London, England. We also collected documents from and held 

discussions with U.S.- and European-owned U.S. defense companies 

included in our review.

We conducted our work from October 1999 through June 2000 in 

accordance with generally accepted government auditing standards.

We are sending copies of this report to other interested congressional 

committees; the Honorable William Cohen, Secretary of Defense; the 

Honorable Louis Caldera, Secretary of the Army; the Honorable Richard 

Danzig, Secretary of the Navy; and the Honorable F. Whitten Peters, 

Secretary of the Air Force. We will make copies available to others upon 

request.

Please contact me at (202) 512-4841 if you or your staff have any questions 

concerning this report. Major contributors to this report are 

Barbara Haynes and Erin Baker.

Katherine V. Schinasi

Associate Director

Defense Acquisitions Issues
Page 21 GAO/NSIAD-00-213 Defense Trade
Page 22 GAO/NSIAD-00-213 Defense Trade

Appendix I

Comments From the Department of Defense ApApeneLdnxeidtexiIrs

(707453)
Ordering Information The first copy of each GAO report is free. Additional copies of 

reports are $2 each. A check or money order should be made out to 

the Superintendent of Documents. VISA and MasterCard credit 

cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are 

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and 

testimony. To receive facsimile copies of the daily list or any list 

from the past 30 days, please call (202) 512-6000 using a touchtone 

phone. A recorded menu will provide information on how to obtain 

these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet, 

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web home page at: 

http://www.gao.gov

To Report Fraud, 

Waste, or Abuse in 

Federal Programs

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)

(707453) Letr

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00