21 Oct 04. The FT reported that the collapse of the defence electronics partnership between Italy’s Finmeccanica and the UK’s BAE Systems risks throwing a further spanner into European defence industry consolidation. But it also offers the Italians an opportunity to reconsider reviving an earlier French alliance project that would have avoided an embarrassing British fiasco.

BAE Systems and Finmeccanica have agreed in principle a revised structure for the Eurosystems transaction. The revised structure will enable BAE Systems to bring together its systems integration activities into a new wholly-owned business comprising the UK operations of AMS, currently a 50/50 joint venture with Finmeccanica, and BAE Systems’ C4ISR Networked Systems & Solutions business. In addition, BAE Systems and Finmeccanica will form a new Avionics business comprising BAE Systems’ UK avionics activities and Finmeccanica’s Galileo Avionica business. BAE Systems will hold a 25% interest in this new entity. Finmeccanica will acquire the UK air traffic management businesses of AMS, together with Gematronik GmbH and AMS (ASI) Inc, in addition to all of the Italian operations of AMS and BAE Systems’ Communications business – CDI. This revised structure is consistent with BAE Systems’ intent to enhance its systems integration and network enabled capabilities (NEC) in the UK. The transaction is subject to negotiation of definitive agreements and applicable regulatory approvals being obtained. A further announcement giving details of the transaction will be made upon exchange of definitive contracts.

Finmeccanica originally forged its joint venture in 1998 with what was then GEC-Marconi. When BAE took over its UK rival, the Italians could have triggered a change of ownership clause to dissolve the partnership. Some in Finmeccanica favoured such a move to negotiate an alternative deal with France’s Thales, ultimately leading to a merger. Europe’s defence industry would have been consolidated around three companies: BAE, the Franco-German EADS and the new Franco-Italian combination.

Others, swayed by the Berlusconi government’s political preference for a UK connection, successfully pushed for strengthening Finmeccanica’s links with BAE. But even before BAE was swept by its current existential crisis, it soon became clear that overall control was going to be an intractable issue.

Now the two sides have decided to part, each taking control of the bits they originally put in the pot. This, in theory, frees Finmeccanica to look again to France. Unfortunately, it is probably too late. The problem lies not just in trying to unravel eight years of joint endeavour with the British. EADS has long had its sights on Thales and is likely to do everything to keep the Italians out.

Comment: Certainly this new structure is cleaner for management purposes and enables BAE to consolidate its C4ISR activities under its own management. In addition the avionics group has a stable of old products and is urgently in need of new investment which will come from Finmeccanica, reflected in the huge write-down for th business in the last set of BAE results. However one problem to be overcome will be a potential culture clash. For some time AMS has supplied the key back-bone expertise to BAE’s C4ISR Division which has failed to win any substantial business. If AMS does not get its way in retaining senior management positions, which is not the usual BAE way of managing its new business, personeel and business might walk out of the door. The systems integration for FRES will be a major target for the new entity which will also have the General Dynamics UK BOWMAN team knocking at its door. Perhaps this is why BATTLESPACE sources suggest that the current perceived ‘knock-BOWMAN’ campaign is being waged?