BAE Systems to Battle on after Merger Plan Collapses

Oct. 10, 2012
BAE chief executive Ian King said: "We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defense and security group.

British arms maker BAE Systems (IW 1000/158) was forced on Wednesday to soldier on under the guidance of an embattled chief executive after the collapse of its proposed mega-merger with European aerospace giant EADS (IW 1000/59).

After ending tie-up talks owing to a lack of accord with "various" government stakeholders, BAE's immediate future was one of a company thrust back into an environment of falling defense spending by governments.

The London-listed firm insisted that it was not looking to merge with an alternative partner.

BAE chief executive Ian King said: "We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defense and security group.

"However, our business remains strong and financially robust. We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate. We remain committed to delivering total shareholder value and look to the future with confidence," he added.

Just this week, the biggest shareholder in BAE Systems, fund manager Invesco Perpetual, warned that it had "significant reservations" over the tie-up.

Invesco said it did not understand the strategic logic for a combination, adding that it would "jeopardize BAE's unique and privileged position in the United States defense market."

Joshua Raymond, chief market strategist at City Index trading group, said Wednesday that "the immediate focus now switches to the strength of the BAE Systems board and indeed of Ian King with major shareholder Invesco, who owns 13.3% of BAE, already voicing strong opposition to both the merger and the current strategy of the BAE board itself."

BAE's share price fell by 1.38% to close at 320.90 pence on London's FTSE 100 index of leading companies, which gave up 0.58% to 5,776.71 points.

BAE shares had traded for 328.70 pence a day before the merger talks announcement was made on September 12.

Under Pressure from Budget Cutbacks

"BAE and its Western competitors still face the same challenges," noted Guy Anderson, senior analyst at defense industry consultants IHS Jane's.

"Defense spending in Europe and the U.S. is on a downward trajectory. Companies with high exposure to defense markets, and with little exposure to the recovering commercial industrial and aerospace markets, will need to convince investors that they have viable survival plans.

"For BAE, the continued sale of businesses gathered during the heady acquisitions boom of the 2000s is probable."

British defense minister Philip Hammond agreed that the group was suffering from state cutbacks around the world.

BAE Systems "has a great future as a defense and technology company but of course it operates in a world where many defense budgets are being reduced," Hammond told the BBC.

"It's going to have to evolve its business model to be effective in a different climate in the future. That's the challenge for the management team," he added.

BAE Systems was created in November 1999 when British Aerospace bought Marconi Electronic Systems, the defense arm of GEC telecoms group, and relaunched itself under the new name.

The London-listed group has since rapidly expanded and is now an expert in the field of defense and security, whereas most of EADS's work is in the commercial sector with its Airbus jet division.

BAE was originally a member of the Airbus consortium, but sold its 20% stake back to EADS in 2006 and concentrated on defense.

The British group now manufactures a host of products ranging from military transporters to Bradley fighting vehicles, Challenger tanks and Queen Elizabeth aircraft carriers.

BAE is also part of the Eurofighter Typhoon consortium that includes the German and Spanish subsidiaries of EADS, as well as Italy's Finmeccanica.

In addition, BAE has ramped up its focus on the United States, with the acquisition of United Defense Industries for $4.192 billion in 2005, and Armor Holdings for $4.1 billion in 2007.

The US market now accounts for about half, or 45%, of BAE Systems' total group revenues, making it the biggest foreign supplier of military goods to the Pentagon.

The group has axed 22,000 jobs over the past three years in response to reduced military spending.

By Roland Jackson, AFP

Copyright Agence France-Presse, 2012

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