Commerce Secretary Howard Lutnick recently disclosed during an interview with CNBC that the U.S. government was considering taking stakes in defense contractors such as Lockheed Martin (NYSE:LMT).
Lutnick’s remarks came in the wake of an announcement that the government was investing around $11 billion in chipmaker Intel (INTC) for a roughly 10% stake in the company.
We asked Seeking Alpha analysts Julia Ostian and Cappuccino Finance whether they thought the government should take equity stakes in defense companies.
Julia Ostian: The possibility of the government taking stakes in defense companies creates a lot of unnecessary uncertainty in the current environment. Benefits for the government could include greater regulatory control, along with cheaper and easier contracts, but from the business side, I don’t see many advantages. In wartime or during a national security crisis, partial nationalization might make sense. Under current conditions, though, the benefits to the government look far smaller than the costs investors would ultimately bear.
Not long ago, I covered Baidu (BIDU), one of China’s largest companies that is seriously undervalued compared to its U.S. peers. The criticism I received was coming from the place of investors not trusting companies with heavy government involvement, and I understand why.
If Washington takes equity stakes in defense companies, the same concern could apply here, and not just from investors. These firms could become less attractive not only to shareholders but also to foreign customers who may hesitate to work with companies that have any internal ties with the government. Especially, it would be bad for Palantir (NASDAQ:PLTR), which works with foreign governments and militaries and is heavily growing in the commercial sector.
If you extrapolate this, the long-term effect could be U.S. defense companies gradually losing their appeal, while the country itself faces the uncomfortable question of whether we are still operating in a capitalist framework.
Cappuccino Finance: No, I think it would be a bad idea for the U.S. government to buy stakes in defense contractors. The political optics would be terrible, and navigating legal matters and conflicts of interest would be a nightmare. Most of the top defense companies’ revenues come primarily from the U.S. military — 70% to 75% of total revenue originates from the U.S. military for companies like Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD), for example. The U.S. government holding major stakes in these companies would make contract negotiations and bidding processes extremely complicated.
Moreover, major government stakes in big defense contractors (and large companies in general) also complicate matters for the Federal Reserve. Recently, we have been hearing a lot about how important it is for the Federal Reserve to maintain its independence. Given that interest rate adjustments have a big impact on stock prices, substantial government investment in any of the big defense contractors would make it virtually impossible for the Federal Reserve to make monetary policy decisions independent of the U.S. government’s interests.