'The last supper': How a 1993 Pentagon dinner reshaped the defense industry
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In 1993, then Secretary of Defense Les Aspin invited the CEOs of America’s largest defense contractors to a secret dinner.
Norm Augustine, then the head of Martin Marietta, remembers getting the call.
“We showed up for dinner at the Pentagon one night dutifully, none of us knowing why we were there,” Norman Augustine, former chairman and CEO of Lockheed Martin, says.
“I happened to be seated next Les Aspin, and I remember I said, ‘Les, this is awfully nice of you to invite us all to dinner, we’re all pleased to have a free meal, but why are we here?’ And he said, ‘Well, in about 15 minutes, you’re going to find out. You probably aren’t going to like it.’”
Today, On Point: How a secret dinner at the Pentagon kicked off a massive consolidation in the defense industry.
Norman Augustine, former chairman and CEO of Lockheed Martin. U.S. undersecretary of the Army from 1975 to 1977.
Rep. John Garamendi, Democratic Representative for California’s 8th congressional district. Member of the House Committee on Armed Services and the House Committee on Transportation and Infrastructure. (@RepGaramendi)
Taylor Giorno, money-in-politics reporter at OpenSecrets, a research and government transparency group tracking money in politics and its effect on elections and policy. (@taylorgiorno_)
MEGHNA CHAKRABARTI: The Pentagon’s budget is not big enough. National debt be damned. That is essentially what Republican Senator Mitch McConnell declared yesterday. Saying, if anything, substantial increases in the defense budget are in order.
MITCH McCONNELL: The defense budget ought to reflect the nature of the threat. We have the ongoing challenge of meeting China in the future. And clearly, in this environment, we need to continue to plus up defense.
CHAKRABARTI: McConnell isn’t asking Congress to do anything new. The House and Senate have a substantial bipartisan history of ‘plussing up’ the defense budget. Take the most recent omnibus spending package passed in December 2022. It’s $1.7 trillion. The Pentagon alone gets half the pie, a record $858 billion. Every other federal agency together received a total of $772 billion. And by the way, that $858 billion is more than the DOD asked for. Congress plussed up the DOD budget by 10%.
The Biden administration had requested only a 4% defense increase in its budget proposal. Meanwhile, that same Congress declined to plus up non-defense spending. Put crudely, the Pentagon gets more money than it needs without even asking. Meanwhile, parents who could use that expanded child tax credit. Sorry, you’re out of luck. This is On Point. I’m Meghna Chakrabarti. Back in September of 2021, we did a show trying to understand how money works in the Pentagon and we learned some rather interesting things, such as:
LINDSAY KOSHGARIAN [Tape]: The Pentagon budget today is almost twice as high as it was in the late 90s.
And no one really knows where all the money is going because the Pentagon has never successfully completed an audit.
REP. MARK POCAN [Tape]: And all we ever get are excuses from the White House, the Department of Defense, why they can’t do it. Well, that’s absolutely B.S. I mean, you can. Like any other area you can have accounting for what happens, but they don’t.
CHAKRABARTI: Now, we haven’t been able to stop wondering why. The Pentagon’s budget could surpass $1 trillion in the coming years. So what are the factors driving this unimpeded growth? Well, obviously, there are a lot of them, and they are complicated. So today, we’re going to focus on just one. It’s a secret dinner that took place deep in the Pentagon back in 1993, and it transformed America’s military industrial complex.
GEORGE H. W. BUSH [Tape]: For over 40 years, the United States led the West in the struggle against communism and the threat it posed to our most precious values. This struggle shaped the lives of all Americans. It forced all nations to live under the specter of nuclear destruction. That confrontation is now over.
CHAKRABARTI: President George H.W. Bush on December 26th, 1991. Two years earlier, the Berlin Wall had fallen, and Bush and Soviet Premier Mikhail Gorbachev met at the Malta summit, a moment heralded as the end of the Cold War. With the Soviet threat receding, U.S. lawmakers saw a rare opportunity at home a chance to reduce America’s vast military spending.
DICK CHENEY [Tape]: As we reduce defense spending and build down our forces, we must do so with a strategy and with common sense as our guide.
CHAKRABARTI: That’s then Secretary of Defense Dick Cheney in March of 1990 as Congress considered defense appropriations for the next year.
CHENEY [Tape]: We should not engage in the kind of radical reductions that followed World War II, Korea and Vietnam. Each reduction left us weaker. Each reduction had to be reversed at great cost. We are now on a prudent path to lower defense spending, one guided by our strategy and an understanding of our enduring military requirements.
CHAKRABARTI: Of course, the United States was soon at war again. That August, Saddam Hussein’s Iraq invaded Kuwait, and President George H.W. Bush authorized the call up of U.S. reserve forces. Remarkably, the House did not back away from trimming Pentagon spending. This is Les Aspin, Wisconsin Democrat and then chair of the House Armed Services Committee, speaking when the House passed the budget in September of 1990.
LES ASPIN [Tape]: The House today, I think, passed the first defense bill of the new post-Cold War era, and it provides for a military that is still primarily shaped to meet the Soviet threat. But I think it takes the first steps towards buying the right stuff for a new kind of a defense.
CHAKRABARTI: From 1991 to 1996, the defense budget dropped by more than 15%. In 1992, then presidential candidate Bill Clinton made a campaign promise. The end of the Cold War required a transformation of the military ‘from the bottom up.’ And in 1993, President Bill Clinton named Les Aspin, his first secretary of defense. Well, Aspin’s bottom-up review influenced the development of the 1994 Pentagon budget.
One thing was clear. Spending reductions were going to decimate the nation’s defense contractors. William Perry, then deputy secretary of defense, reportedly said, quote, ‘We expect defense companies to go out of business. We will stand by and watch. It happened.’ Except that Aspin and Perry didn’t exactly stand by. In the fall of 1993, they quietly invited CEOs of the nation’s top defense contractors to dinner at the Pentagon. Norman Augustine was one of the invitees and he joins us now. Mr. Augustine, welcome to On Point.
NORMAN AUGUSTINE: Thank you. Very nice to be with you.
CHAKRABARTI: In 1993, what was your title?
AUGUSTINE: At that time, I was the chairman and CEO of Martin Marietta Corporation, which was an aerospace firm.
CHAKRABARTI: Aerospace and major missile designer and manufacturer as well, a very important company in the world of defense. So when did you get this call from the Pentagon that you were invited to dinner there?
AUGUSTINE: Well, as you said, it was in the fall of 1993. That was a time that the Cold War would come to an end, and really the Berlin Wall fell in 1989. Soviet Union ceased to exist in 1991, so defense appeared to be entering into a new world. And we were invited by Secretary Aspin to a dinner at the Pentagon. When I say we, it was probably 20 or 25 CEOs of aerospace defense … companies.
CHAKRABARTI: Did they tell you why Secretary Aspin wanted you to come to the Pentagon with your colleagues from the defense contracting world in person?
AUGUSTINE: We were simply invited to come to dinner in the secretary’s dining room next to his office. And needless to say, that’s an invitation you don’t refuse. So we all appeared.
CHAKRABARTI: You actually ended up sitting right next to Secretary Aspin, is that right? During the dinner portion?
AUGUSTINE: During the dinner. But for whatever reason, I don’t know, but I happened to be sitting next to the secretary. And of course, I wonder why I was there. So I said to him, these were very hard times, and it was nice to get a free meal. But why are we here?
CHAKRABARTI: What did he say?
AUGUSTINE: He responded that you’ll know in a few minutes, and you probably won’t like it.
CHAKRABARTI: Oh, dear. Okay. So I’m sure that that didn’t make you feel terribly confident about what was going to happen next. But then I understand that dinner wraps up and you go into a conference room nearby. And was it William Perry who then began speaking?
AUGUSTINE: That’s accurate. We went to a little room next to the dining room by the secretary’s office. It really wasn’t a conference room. More just a little presentation room with a screen and the 20 or 25 of us had chairs there and looked at the screen. The secretary welcomed us all. Then deputy secretary Bill Perry made a presentation.
CHAKRABARTI: And in that presentation, William Perry provides basically some information about what the Pentagon thinks is going to happen regarding its procurement over the next several years. What did Perry say?
AUGUSTINE: Well, it was … obviously a difficult time for the Defense Department. As the U.S. has often done at the end of a war is cut way back in defense. And people spoke at that time of the defense dividend, the peace dividend, that was the end of the Cold War and that the country could divert funds to other reasons. The Defense Department clearly was going to have a major budget cut. And if I take the example of the industry I’m most familiar with, aerospace, at that time, there were about 15 companies.
And the ideal from a standpoint of national security would be to continue to have 15 very strong companies of various sizes. It would be good for competition, would be good for the industrial base. The problem was that wasn’t a choice. And so I’m in no way critical of what the position that Secretary Perry took. I think they had bad choices to choose from, and he did the best you could have done under the circumstances.
… Secretary Perry made a presentation using a graph that was projected on the screen. And it was a stunning graph, so much so that the following day I went over to the Pentagon and asked for a copy of it, which I still have. And what was startling about it was that the Defense Department was saying there are way too many companies in the defense industrial base. That we can’t afford them. And that we couldn’t have a bunch of companies with half full factories and not enough money to invest in research and development, huge overhead, high costs. And we need to consolidate the industry.
And just to give you an example, the chart had a column on it that showed how many companies in various categories of military equipment, like fighter airplanes, tanks or what have you, how many companies the Defense Department was going to be able to afford to keep in business. And as an example, there were 16 categories of equipment and there were three. The government said it could keep three companies in business in one of the categories. In another of the categories it could afford to keep, let’s see, it was six categories, it could afford to keep two companies in business. And there were seven categories where it considered it could only keep one company in business.
CHAKRABARTI: Mr. Augustine, you were just describing how at this last supper, Bill Perry had this chart. And it showed various categories of military equipment and spending. Bombers, submarines, tanks, things like that. And then there was one column that showed how many companies were currently providing that equipment. Like, say, I believe in the early 90s, there were like three main companies that were providing equipment for bombers, let’s say. And then Perry had a second column that showed how many the Pentagon felt like they could keep in business or that they would need in the coming years, post-Cold War. And in some of those columns, there was just the number one. Do I have that right?
AUGUSTINE: That’s accurate. Needless to say, I was stunned, for really two reasons. One, it pointed to how fragile our defense industrial base was going to become. But there was another factor that to me was also important, that in those areas there would not be competition. I happen to be a strong believer in competition. The free enterprise system, I think has served our country well. And apparently we were in such a financial position where we weren’t going to be able to afford that and in some areas.
CHAKRABARTI: So then what did Aspen and Perry tell this gathering of CEOs from the defense industry? Like this is what’s happening. The defense budget is going to decline. This is how many companies that we can continue to work with. Did they have any recommendations of what you should do as you filed out of the room?
AUGUSTINE: They did. They had made very clear what they could afford and they were going to pay for companies that had one third of all factories and inefficiencies to go with that. And they said that the government was not in the business of redesigning companies or consolidating industries or putting people in or out of business. That was up to us, the CEOs of the companies that were in the industry at the time.
And that was quite an awakening, they heard from the Defense Department on how small an industry would be afforded. And I should add to that that in serious war time, the defense industrial base is really the national industrial base. And it too had manufacturing was severely declining at the same time. And in 1980, 18% of the workforce in the nation was in the manufacturing world. Shortly after the Last Supper it was 7%. So the commercial industrial base was declining and the defense industrial was going to decline. Big worry for any future need for large scale military equipment.
CHAKRABARTI: Now, walking out of the meeting were the various CEOs, including you, Mr. Augustine, were you sort of looking at each other being like, Hey, good luck to ya?
AUGUSTINE: Yes, I was somewhat surprised by the reaction. It was kind of things are going to be very tough for you and your company, but nobody seemed to be absorbing it for their own company. And the next day, I was asked by a reporter what had happened at the dinner, and I said, well, it was a last supper. And that sort of stuck. And it was in many regards, the Last Supper.
CHAKRABARTI: You’re the one who came up with that phrase. It was off the cuff?
AUGUSTINE: I’m sorry. I didn’t hear that.
CHAKRABARTI: When you said to that reporter that it was like the Last Supper for the defense base? Was that just an off the cuff phrase?
AUGUSTINE: Oh, absolutely. Just popped … [in] the mind at the time. But there had been a lot of curiosity, both in industry and in the media that relates to the industry as to why we were all being invited to dinner at the Pentagon. That never happened before to my knowledge. And so when they asked, it just occurred to me, well, it was the Last Supper.
CHAKRABARTI: So really the Pentagon said this is happening. There’s going to be a reorganization. You guys take care of it. Now, one thing that could have happened is that companies could have just gone out of business. But that’s not what happened. There was this incredible period of consolidation and mergers. So can you tell me a little bit, Norman Augustine, about the roles or the role that policies at the Pentagon itself or politics played in advancing the mergers of the company, for example, that you ended up being the CEO of, Lockheed Martin?
AUGUSTINE: The policy of driving companies out of business, I wouldn’t even say that was a policy. The policy was to streamline the defense industry so it didn’t have a lot of overhead. And I also saw many of these companies had capabilities that the government wanted to maintain. But in the next three years, we saw our industry lose 40% of its employees to the aerospace industry, and nearly 70% of the companies were basically absorbed and other companies were combined together to be more efficient. And it saved the government a great deal of money. The problem was it reduced the size of the industrial base, should we need one in the future.
And I have to say very quickly here that this has not been uncommon, though. I mentioned that we talked about the peace dividend at the end of the Cold War during World War II in Great Britain. The comment was made that we’ll have peace in our time. And you go back to at the end of World War I, Churchill made what I thought was a more remarkable statement right at the end of the war. He said that war is unthinkable in this modern world that we live in. We have the League of Nations, We have travel people from all around the world getting to know each other. Businesses work in all countries together. And it’s just unthinkable that we could have a major war. And then he said, it would be a pity if we were wrong.
And that’s the tough part of the issue. When you don’t need defense in the short term, it’s very tempting and probably appropriate in some cases to cut back. The trick is not to cut back so far. And at that time, at the Last Supper, China wasn’t even an issue. I was among the first Americans to ever travel in China, and huge crowds would follow me just because they were curious. I saw maybe a half a dozen bicycle. That was 1978. Excuse me, half a dozen automobiles. Everybody had bicycles. One of the questions I often got from people in China, they had apparently heard that Westerners were supposed to be wealthy. People in China would ask me, how many bicycles do you own? That was a measure of wealth.
And so China wasn’t even on the cards at that time, or in the cards. Russia at the time, or even today, Russia is a country with a population of Mexico or a GDP of Spain and 16, 050 deliverable nuclear warheads. I think it was John McCain that said Russia is a filling station with nuclear warheads. And we’re seeing what that means in today’s world when one thinks about places like Ukraine, Taiwan and so on.
CHAKRABARTI: Well, so the sort of change in global context is important to keep in mind as we talk about sort of where the world is now. But I want to just refocus for a moment on the creation of Lockheed Martin as a company. Because as you know well, the world of M&A is littered with a lot of mergers that didn’t quite go as planned in that they didn’t accomplish what was hoped for in bringing companies together. But when Lockheed Martin was formed, I think something like, what, 15, 16 or 17 groups in a sense, were brought into one company. Did the Pentagon and particularly the Justice Department, did they do anything to actually smooth the way for that merger to succeed?
AUGUSTINE: Well, you make an interesting point, and that is it. The history of mergers and acquisitions in the United States has it. About 80% fail to accomplish the objectives they set out to accomplish. And those aren’t just in the defense world. Those are companies overall. And so to go into a strategy of mergers and acquisitions was obviously high risk. And also to build a bigger company in a time when the market was collapsing or was also a risk. There were good reasons to take that risk, at least in my view, and our board view and many other boards.
And so we set out to put together pieces of companies or all of companies, and we put together … about 17 organizations in the next couple of years. And became much more efficient and were able to provide a great deal of savings to the government from what they were purchasing from us. I’ve said at the time, and I’d say it again, that I’d rather have 17 healthy companies in industry rather than 17 weak companies. But the 17 healthy company wasn’t on the agenda. And so the question was, would you like 17 companies or three or four strong ones or even, as it turned out, one or two. That was the choice. And the antitrust world, at that point in time, was very supportive of the companies going together with a great deal of encouragement on the part of the Defense Department.
CHAKRABARTI: At that point in time. Because I understand that you, for example, a little later on, Lockheed Martin wanted to, I think, acquire General Electric Aerospace. But there were parts of the government that were maybe looking on that not so kindly. And you called Bill Perry up and said, hey, we’re trying to do this merger. And your colleagues over at DOJ aren’t really falling in line. Help us out here.
AUGUSTINE: Yes. The first merger we got involved in was with General Electric Aerospace Company or Division, I guess. And the antitrust folks at that time were making it very hard to put the two organizations together. That was the beginning, as I said. And so I actually watched the Pentagon visit with Secretary Kerry and said that if you really want the Iraqi industry to consolidate, you better tell your friends in the government to get with the program.
CHAKRABARTI: And they did thereafter. So, Bill Perry’s role here is quite important because by 1997, things started changing in the Pentagon, the Department of Defense, that was once encouraging after the Last Supper, all this big consolidation in the defense sector, it was starting to look a lot different.
WILLIAM PERRY [Tape]: The hardest farewell to say is to the troops who served me and whom I have served. Words cannot adequately describe my pride in you.
CHAKRABARTI: Now, that is William Perry in January of 1997, on his way out as secretary of defense. Now, recall, he was the guy back in 1993 who said, you know, we expect defense companies may go out of business and we will stand by and watch it happen. Well, in his place came Secretary William Cohen. And during Cohen’s confirmation hearings, he, in fact, raised some concerns about the dwindling amount of competition in the defense sector because the mergers were continuing apace. Just one month earlier, two companies announced one of the biggest mergers yet.
PHIL CONDIT [Tape]: Good morning. I’m Phil Condit. In a few minutes Harry Stonecipher and I will hold a news conference to announce publicly we are now operating as a single company. This is truly a historic moment and it’s hard not to say, wow.
CHAKRABARTI: So that was an internal company video from aviation giant Boeing. Phil Condit was its CEO. And in December of ’96, Condit announced Boeing’s $14 billion acquisition of McDonnell Douglas, then led by Harry Stonecipher. Well, soon after that merger came Raytheon and its purchase of the Defense Holdings of Texas Instruments and Hughes Electronics for $2.5 billion. Now, none of those mergers faced, you know, a ton of regulatory opposition.
The Justice Department did require Raytheon divest itself of a TI business unit that produced some components for radar systems. But the overall merger was allowed to go through in July of 1997. But here’s the thing. In July of ’97, the Justice Department also signaled a notable change in its tune about defense sector consolidation. Joel Klein was the newly named assistant attorney general in the DOJ’s antitrust division. And on July 2nd, 1997, he said while industry downsizing can be desirable or even necessary, we will do what it takes to preserve effective competition. So, Mr. Augustine, what did you make of these personnel and political changes going on at that time?
AUGUSTINE: As I said, I’m a strong believer in the free enterprise system and competition. I say that as an American and also a person in business. I’d rather compete with strong companies are weak companies that do desperate things. And so I find no fault with what Secretary Perry did under the circumstances. … I will say that I’ve worked ten years for the government in six different jobs, and I get it. Our government makes the rules and interprets the rules and enforces the rules and industry follows the rules. And that’s the way it ought to be.
My complaint about the way that the switch and policies are handled is that nobody told the industry that there was new policy. What happened was a new person came into Justice and a new person into Defense, and they adopted policies that they thought were appropriate to the new times. And I don’t find fault with that. But I wish they had told the industry that there’s a new policy now. It was a little like, you know, if you put up a sign that says speed limit, 35 miles per hour, most of this industry will try to go no less, no more than 35 miles an hour. But when you put up a sign that says no speeding subject to arrest, that isn’t very helpful.
CHAKRABARTI: We have about 30 seconds before we have to take our next break, Mr. Augustine. But I want to quickly ask you, Joel Klein made that announcement about, you know, maybe not being so keen on mergers on July 2nd of 1997. The next day, on July 3rd, Lockheed Martin announced its plans to acquire Northrop Grumman for $11 billion. So just begin to give me an answer here. What made you continue to pursue that deal?
AUGUSTINE: … McDonnell Douglas, the Europeans rejected that some. The United States strongly backed the deal. And so on the heels of that, it seemed to us, having not been clearly told anything else, that combining Northrop Grumman and Lockheed Martin made a great deal of sense and would save the government literally billions of dollars a year. And that’s been audited. The trouble with that, of course, is it reduces the size of the number of companies in the defense industrial base, which is something that I think would prefer not happen for the longer term.
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