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BAE DENIES MERGER TALKS WITH GENERAL DYNAMICS

22 Oct 03. BAE Systems PLC hasn’t held formal talks with U.S. defense company General Dynamics Corp. (NYSE:GD – News) over a possible merger, a spokeswoman for BAE said Wednesday. (See BATTLESPACE UPDATE Vol.5 ISSUE 41, October 17th 2003, GENERAL DYNAMICS REPORTS FALL IN EARNINGS BUT INCREASED).

“No formal discussions have been held regarding a merger with General Dynamics,”she said, adding that if there had been proper talks that required due diligence BAE would have had to inform the stock exchange. The FT reported on Wednesday that General Dynamics has dropped the idea of a transatlantic merger with BAE following talks and a visit to London earlier this month by General Dynamics’ chief executive officer.

BAE Chief Executive Mike Turner has said he’s keen to boost the company’s presence in North America and capitalize on spending on defense technology by the U.S. government.

The FT reported that although BAE has acknowledged talking to all five prime US defence contractors about a merger, the discussions with General Dynamics were the most advanced and its decision to drop out puts BAE’s efforts to complete a transatlantic deal back to square one. The break-off in talks comes after similar cooling of interest from Boeing earlier this year and before that a pass by Lockheed-Martin. A BAE official would only say that the company remained committed to expansion in the US, where it now generates almost a quarter of its revenues, either through continued internal growth or a large merger.

“Our basic position for some time has been: if there is to be further consolidation in the industry, we want to be part of it,” the official said. General Dynamics declined to comment.

The decision to end talks came after a low-profile visit to London earlier this month by Nicholas Chabraja, General Dynamics’ chief executive. The company is said to have expressed intense interest in BAE’s profitable and fast-growing North American operations – a mix of high-technology defence systems and electronics businesses acquired from Lockheed three years ago in two deals totalling $2.2bn – but was less enthusiastic about acquiring UK businesses, which include BAE’s troubled Astute submarine and Nimrod patrol aircraft programmes. Asked why General Dynamics was so put off by the UK end of the business, one person close to the discussions in the US said: “Have you ever seen the movie Brazil?” – a film where any initiative is stymied by overweening and wrong-headed bureaucracies. It is, in some ways, an unfair criticism. BAE’s UK business is poised to benefit significantly from the MoD’s halting move towards network-enabled warfare. Moreover, its joint ventures like MBDA, Europe’s premier manufacturer of missiles, and AMS, a leading defence electronics shop, are highly-valued assets. The company has also moved to stanch the bleeding from troubled programmes like the Astute submarine and Nimrod maritime patrol aircraft. Still, it is the memories of the problems thrown up by those two programmes, plus other high-profile setbacks such as the much-delayed amphibious assault ships, that appear to have frightened GD away. But even big BAE programmes that have not faced such daunting problems in recent months – such as the Type-45 destroyer for the Royal Navy and the Eurofighter – may face the chop as a result of the publication of the government’s procurement white paper next month.

When BAE said it was not willing to part with the North American division, General Dynamics decided to end discussions, even though it had spent several weeks sifting through the UK company’s financial data.

“They got to the stage of looking under the hood,” said one person in the US. “You look at the stuff they acquired over here and you just drool but it was not for sale independently.” Mike Turner, BAE chief executive, has been very vocal in his desire to achieve a transatlantic deal, saying the European

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