Tad DeHaven
The federal government is to become the customer, regulator, and partial owner of a defense contractor under a deal announced by the Pentagon this week.
When the Trump administration’s corporate equity acquisition spree got rolling in August, Commerce Secretary Howard Lutnick stated that defense contractors were being considered. On January 13, the Pentagon announced a $1 billion investment—structured as convertible preferred equity—in L3Harris’s Missile Solutions business, which is slated to be spun off and taken public in the second half of 2026. Under the deal, the preferred security would automatically convert into common equity at the initial public offering, with L3Harris retaining majority ownership of the new company.
The Pentagon is framing it as the first “direct-to-supplier” deal of its kind and says it will enable negotiation of multi-year procurement framework agreements for solid rocket motors, subject to congressional authorization and appropriations. It’s intended to speed up the production of rocket motors (SRMs) needed to replenish the Department of Defense’s (DOD) missile reserves.
The DOD’s “direct-to-supplier” approach primarily involves contracting with and investing in sub-tier suppliers rather than routing everything through prime contractors. However, the Pentagon already has multiple non-equity tools (multi-year contracting, Defense Production Act Title III purchase agreements/grants/loans/loan guarantees, and contract financing) to create demand certainty and boost capacity expansion.
Indeed, L3Harris began construction last year on rocket motor production facilities in Arkansas as part of a $215.5 million agreement with the DOD under the Defense Production Act (DPA). The DPA was also used last year to award $14.3 million to Anduril Industries to increase SRM production capacity, with the Pentagon announcing a $13.9 million joint investment with X‑Bow Systems to bolster supplies shortly after.
Regarding the equity stake, the DOD’s Under Secretary for Acquisition & Sustainment, Michael Duffy, stated that “We’ve had a pattern within the defense industry of writing checks from the Department on behalf of the taxpayer to expand the industrial base with no promise of return .… This is about to change.”
Yes, the military-industrial complex has a rich history of gouging taxpayers. Efforts by the Pentagon to spend taxpayers’ money more efficiently are thus welcome. But the “return” to taxpayers should be protection from foreign adversaries, not a dividend check they’ll never see that spendthrift politicians will fritter away anyhow. The federal budget isn’t a mutual fund, and it shouldn’t be.
The equity deal puts the Pentagon in the undesirable position of owning part of a contractor that will compete for—and seek to win—large federal procurement awards, raising obvious conflict-of-interest and neutrality concerns. L3Harris’s CEO says the deal is “purely an economic investment” and that the DOD “will not be on the board of directors or involved with managing this company.”
To which I would respond that the Pentagon reports to a president who called up Coca-Cola to badger the company into using cane sugar in its products.