BAE Systems faces uncertain future after collapse of EADS merger talks

The proposed £30bn merger between BAE Systems and EADS may have collapsed but uncertainty still reigns for Britain’s defence giant.

The proposed £30bn merger between BAE Systems and EADS may have collapsed but uncertainty still reigns for Britain’s defence giant.

The companies’ decision to abandon talks has left many fearful that BAE is now more vulnerable to a takeover bid or a break-up.

The company claimed yesterday that it would carry on as it was before, building up its existing businesses and expanding in its international markets. But that no longer seems to be a luxury the company can afford.

Some of the company’s largest investors have been maddened by what they believe to be BAE’s failure to attempt to properly communicate the merits of a deal with EADS. And without a deal, what are its intentions?

One major BAE shareholder said the company was now “a sitting duck”. “BAE are in a precarious position. They have spent the last few weeks persuading people that they had to diversify their revenue stream away from defence in order to compete. Now, they have to come up with a reason why they don’t,” the investor said.

The merger and subsequent collapse has put the spotlight on BAE and its focus on a shrinking defence market. It has a heavy reliance on the UK and US markets, which account for 70pc of business but where there is little clarity on the long-term potential for fresh contracts.

Britain is lacking a defence strategy to support BAE, one senior industry source said yesterday, while the US military is braced for steep spending cuts that are part of plans to cut the country’s national debt.

Prospect, the union representing BAE’s engineers, said the decision to abandon talks with BAE raised “profound questions” for the future of the British defence sector and industrial base.

“Thousands of skilled jobs have been lost at BAE over the last two years and we fear the loss of thousands more if BAE cannot expand its order book into new markets,” said Mike Clancy, general secretary designate of the union.

Over the coming days and weeks BAE will emphasise the importance of its cyber and intelligence business Detica, the security sector, and its markets outside the UK and US, in Saudi Arabia, India and Australia.

Ian King, BAE’s chief executive, insisted yesterday that the collapse of the talks had not put the company in play, vulnerable to being broken up or sold. “We do not think the flood gates will open. We haven’t damaged the business by pressing ahead.”

Many disagree. One senior industry source said the BAE board must have an immediate strategy meeting and consider the sale of its US business, which could be used to pay off the pension deficit and fund projects in Saudi Arabia. He said Lockheed Martin would be interested in buying back the US electronics business.

Analysts in the US said American companies would now be looking closely at potential benefits of buying parts of BAE. “There is no question that BAE has attractive properties in the US,” says Lauren Thomspon, a defence consultant at the Lexington Institute.

Another option for BAE would be to build up the business by buying a British growth company like Babcock, the engineering support services group.

The British Government seemed to claim crystal ball powers yesterday saying both companies would remain “successful independent companies”. Hope will not be enough; for BAE, the work starts here.

Source: Telegraph