Frank Kendall, the Defense Department’s undersecretary for acquisition, technology and logistics, may be rightly concerned about the rate of mergers and acquisitions happening in the federal market.

Kendall issued a statement Sept. 30 after Lockheed Martin’s plan to buy Sikorsky cleared the Justice Department’s antitrust process about the potential impact of mergers and acquisitions on the defense industrial base (DIB).

“Since 2011, DoD’s policy has been that it would not look favorably on mergers of top tier defense firms. Lockheed’s acquisition of Sikorsky does not constitute a merger of two top tier defense firms and it does not violate that policy. However, this acquisition does result in a further reduction in the number of weapon system prime contractors in the defense industrial base,” Kendall said in an emailed statement. “Over the past few decades, there has been a dramatic reduction in the number of weapon system prime contractors producing major defense programs for the DoD. This transaction is the most significant change at the weapon system prime level since the large scale consolidation that followed the end of the cold war. This acquisition moves a high percentage of the market share for an entire line of products — military helicopters — into the largest defense prime contractor, a contractor that already holds a dominant position in high performance aircraft due to the F-35 winner take all approach adopted over a decade ago. Mergers such as this, combined with significant financial resources of the largest defense companies, strategically position the acquiring companies to dominate large parts of the defense industry.”

Broaden Kendall’s comments to all of the federal market — particularly information technology and professional services — and the M&A activity that has been fast and furious over the last two years should be just as concerning for civilian agencies.

John Yim, director at KippsDeSanto & Co., an investment firm that tracks mergers and acquisitions in the federal community, wrote back in August there already have been 39 deals in 2015. In 2014, vendors conducted 79 mergers and acquisitions and in 2013, the number was 65.

“Bolstered by an anticipated uptick in federal spending during quarter four of the government fiscal year 2015 is poised to continue the recent trend of increasing deal counts over the past few years,” Yim wrote. “The expectation of more than 80 deals this calendar year will surpass previous years’ totals and further perpetuate the development of an increasingly active M&A market.”

Add to that a recent survey of government contractors by the Professional Services Council and Grant Thornton that found revenues are flat or decreasing for a majority of respondents and 20 percent say they plan to sell their company in the next two-to-three years and about half said they expected to sell their company in the next three-to-five years.

This data further substantiates Kendall’s concerns over increased M&A activity.

“With size comes power, and the department’s experience with large defense contractors is that they are not hesitant to use this power for corporate advantage,” Kendall wrote. “The trend toward fewer and larger prime contractors has the potential to affect innovation, limit the supply base, pose entry barriers to small, medium and large businesses, and ultimately reduce competition — resulting in higher prices to be paid by the American taxpayer in order to support our warfighters.”

Rich LaFleur, a partner with Grant Thornton and director of the 20th annual contractor survey, said in an interview with Federal News Radio that the M&A activity is being driven by a handful of recent changes in the federal market.

“Without a lot of new contracts, vendors have to look to M&A to grow,” he said. “It’s not M&A for M&A sake. The data indicates less than half of acquisitions end up being effective, while expectation out there is for continued M&A activity.”

He said the survey asked companies who were looking to buy others if they have walked away from a deal in the last year. Nearly 70 percent indicated they had because of something they found during the due diligence stage.

Another potential reason for the increased M&A activity is the rate of incumbents winning follow-on contracts.

Respondents say 75 percent of the time the incumbent contractor wins the follow-on work too.

“The win rate doubles from 33 percent to 66 percent if companies are innovative around creating new joint-ventures or new legal organizations,” LaFleur said. “What does that do is helps the vendor not be a prisoner of their legacy cost structure and the way they did business before. If they create a new company and are innovative around how overhead rates are billed and the amount of general and administrative (G&A) they have to account for, they can increase revenue and profits.”

Not everyone believes increased M&A activity is a bad thing.

The Aerospace Industries Association released a statement reacting to what Kendall said. AIA said the consolidation is a natural result of decades-long trends in defense acquisition.

“Consolidation is market-driven and enhances the efficiency with which we deliver the world’s best equipment to the American warfighter,” AIA said. “We’re seeing fewer and fewer new programs which start farther and farther apart. With fewer programs for which to compete, the stakes for individual companies grow ever higher — loss of a contract competition could mean the end of a company’s ability to compete for defense work. In this environment, it’s no surprise that industry is looking to become leaner and more efficient.”

But when does consolidation go too far and create an oligopoly? When does competition get impacted because there are few large businesses and the rest are small/start-ups? This is a real concern for the entire government that the Office of Federal Procurement Policy, the General Services Administration and DoD need to address.

This post is part of Jason Miller’s Inside the Reporter’s Notebook feature. Read more from this edition of Jason’s Notebook.

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