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Cobham – Advent Deal Critics Continue Perpetuating Myths By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

It is a pity that critics of the agreed takeover deal of Cobham by the US private equity company Advent International continue to perpetuate ridiculous myths about what Cobham is and does today, ignoring that the majority of its businesses are located internationally whilst at the same time, making unfounded suggestions that takeover by a US based company will likely suck jobs out of the UK economy. What nonsense this is!

If history of acquisitions UK defence and aerospace companies over the past three decades is anything to go, US companies have an excellent record of investing in their UK subsidiaries. Look at some of those that have occurred such as the acquisition of Smiths Aviation division by GE, the Ampthill operations of INSYS that used to be part of Hunting Engineering and were acquired by Lockheed Martin UK a few years ago, the huge and ongoing investments made in the UK by Thales, Leonardo’s superb Edinburgh based radar operations in the UK not to mention the large scale investment that these and other US and European companies such as Raytheon, Airbus continue to make in their many UK investments. Boeing too has been stepping up its investment in the UK. The bottom line for me is that rather than worrying about who owns a company particularly if they are regarded as a UK ally and member of NATO but judge them by what they do and how they invest in the companies that they acquire or develop. To the best of my knowledge, none of these companies above has ever been suggested as posing a threat to national security and neither should they be. 

Suggestion in regard of the potential loss of high-tech jobs and manufacturing capability and a threat to UK national security have absolutely no foundation whatsoever. Why is it I wonder that all of a sudden Cobham which was hardly a household name and in respect of being a public company has been languishing somewhere well down in the FT 250 having been struggling through a period of difficult times has all of a sudden been pushed to a level of prominence in regard of UK based activities that in reality represent a small fraction of the overall assets, people employed and of what the company does?     

Yes, Cobham is an important company in the sphere of defence but it can hardly be regarded as a national champion. Neither, unlike larger UK defence companies, does or has the Government ever held a golden share in order to ensure the company remains UK owned.

In my view, claims that the acquisition of Cobham by Advent represents a threat to the national interest are absolute nonsense. Today no fewer than five of the MOD’s top 10 suppliers are foreign owned, a fact that has never once raised alarm bells in regard of sovereignty or control. I don’t do football but If I was to be less serious for a moment and suggest that if Cobham was to be placed in something similar to a football league table of MOD suppliers I would have to suggest that it would be sitting mid-table in the first division with little or any chance of promotion to the championship!

Of course, it is right that if the government does have any concerns over Cobham’s UK activities it should request certain commitments from Advent International. To that end I am sure that any necessary assurances sought would be given. 

We have to realise that the UK Defence industrial landscape today is very different to what it was twenty and thirty years ago. Procurement decisions by the MOD today are most often, rightly or wrongly, made on the basis of providing value for money over that of what is the best capability available. Successive UK Governments have embraced free and open market just as they have sought, where appropriate and allowed, to acquire defence equipment capability from wherever they believed a supplier could provide best value for money. Sadly, none of our allies have displayed a similar open policy and having made the conscious decision to open up the UK defence market to foreign companies meant that UK based specialist defence companies often struggled and lost out. This policy also encouraged foreign companies to invest in the UK just as it did UK companies to invest internationally in foreign markets such as the US and which over the past thirty years is exactly what Cobham did.  

Suffice to say that over the years the Government has, despite words to the contrary, been increasingly content to purchase off the shelf capability, largely from US contractors. Today, buying of US manufactured defence and particularly, aerospace capability is commonplace and the relationship between the US and UK in regard of defence and of our collaboration as allies has never been.   

Today in the eyes of the MOD UK owned companies get absolutely no preferential treatment. As a UK owned company, it is worth noting that Cobham was forced to compete on every one of its MoD contracts last year (note that the number of MOD contracts actually competed last year was 42%) and that most often the company lost out. Other examples of how Cobham recently lost out include the MFTS contract for MoD flying training which it had successfully operated for the MOD over the past twenty-five years and more recently, the UK’s operational readiness training competition (ASDOT), which was suddenly terminated. In this competition Cobham was leading an all UK consortia, and having been for 30 years and indeed, continuing to be the supplier until the present contract ends, Cobham found itself competing against three other consortia who were based on Israeli, Italian and French led solutions.  

The point to realise then is that despite political rhetoric to the contrary the MOD has and continues to resist any urge to protect and reward UK sovereign capability.  As far as I am concerned potential ownership of Cobham poses no challenge to the status quo of how the MOD operates. Nor does it have any bearing on pre-supposed national interest grounds. 

Much has been made by critics of the deal of this proposed takeover destroying the legacy of the founder, Sir Alan Cobham which was founded on air to air refuelling, a capability that still dominates the business today in respect of external belief of what Cobham provides in relation to airborne hose aircraft to aircraft refuelling.  And yet the truth is that today air to air refuelling equipment accounts for less than 10% of Cobham’s revenue. Royal Air Force and foreign air force aircraft today and tomorrow are and will be refuelled from a US or European built tanker aircraft and while sovereignty of the hose and basket Cobham systems are still to be considered vital, they are no longer the only option.

Cobham is today a supplier of components and systems, most of which it sells to the large Prime contractors rather than the end user. The company has prominent positions on some very large international projects such as the US built Lockheed Martin F35 Joint Strike Fighter and is a major supplier to Boeing and Airbus tankers. Although approximately 20% of Cobham’s work force are located in the UK the US Dept of Defense accounts for over 40% of Cobham’s revenue – this resulting in the largest proportion of Cobham workforce being US based.

Cobham provided and continues to support refuelling equipment supplied for the 14 Airbus A330 MRTT aircraft in service with the Royal Air Force. However, in the US Cobham is providing air to air capability for the entire USAF fleet, including the new Boeing KC46 programme of which USAF plan to reach a fleet size of at least 179 aircraft. This is very important work for Cobham but it is predominantly US based. The point here is that it is being internationally as opposed to purely nationally focussed that has been the necessary element of Cobham’s strategy success.

The press and media hype surrounding Cobham’s acquisition appears to have centred on 4 main points – price, heritage, sovereignty, jobs and research and development:    

In respect of price while it is true that the price had been much higher in year past, this was before some major errors of judgement by a past board of directors and remembering too that back then there had been many fewer shares in issue prior to the 2 rights issues.

The Cobham Board has a singular responsibility to act in the interest of shareholders and that in my view, taking everything into consideration is exactly what it has done. The Cobham family which own just 2% of the stock have raised several objections and it is true that the largest shareholder, Silchester has questioned the price. 

Of course, heritage of any company is important but in the case of Cobham such views are somewhat romantic after all that the company has subsequently gone through. The truth today is that Cobham bears little resemblance and that the new heritage is of an organisation made up of a large number of technology companies, each of which have their own rich history. Cobham is today all the stronger, more diverse and successful as a result. Worth noting that since 2005 Cobham has acquired and absorbed 55 new businesses and that adding this up makes Cobham an entirely different one to how it is often portrayed.

In respect of sovereignty I take the view that this is another romantic notion and one that paradoxically perhaps, in a post BREXIT Britain, will need to embrace the internationalisation of the UK economy as opposed to the protection of it.

In respect of the jobs and R&D I am sure that certain assurances which are likely to be sought will be given. That said, the bottom line for the future and ultimately, job security is about maintaining a competitive position in order to secure future business.

In respect of potential for government intervention to stop this deal all that I would say is why should they and what reason have they for so doing? The UK has long prided itself on having and active free and open market approach to defence procurement in particular and ownership. A reversal now, or a serious interjection in what is a relatively minor supplier to the UK MoD, as Cobham is, would send ripples that would have a number of potential consequences.

Worse perhaps is that Cobham itself would suffer from a lack of choice and flexibility.  If the only reason for blocking a deal was political Cobham could well find itself side-lined. International customers would likely shy away from it, concerned of further UK Government interference and quite probably, the impact wouldn’t stop at Cobham as such a reversal of government policy (especially so close to BREXIT) would likely cause other international businesses far more wary of either investing or competing in the UK for fear of increased political interference. 

Even worse in my view is that this could be disastrous, especially for US relations with the UK in relation to defence at a time when economic choices of post BREXIT Britain play out. If government really believes in developing sovereign defence industrial policy it should remain with the status quo.

CHW (London – 6th September 2019)

Howard Wheeldon FRAeS 

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue  


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