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THE EUROPEAN PENDULUM SWINGS AS BAE LOOKS ON

21 Feb 05. As the boardroom rumpus at EADS dies down and the likelihood of a Thales-EADS merger, championed in some quarters as the answer to EADS small electronics segment, is resisted, the European pendulum appears to be swinging again to new alliances with a Thales-Finmeccanica one being the latest. At BAE’s results today, Mike Turner said that the company had no intention of disposing of its Airbus stake, after all it is generating £2.66m of turnover and £196m approx. of profit, or the MBDA JV; one candidate for disposal could be the STN Atlas stake. However BAE is also tidying up its European businesses by bringing down its stake in Saab from 35% to 20% which will reduce the company’s bidding and support costs but retain BAE two seats on the Saab Board. However there was little sign that BAE intends to increase its European exposure but appears to be keener to watch from the sidelines whilst expanding deeper into the US. This is in stark contrast to John Weston, former European champion of BAE’s European strategy who made a clear play for a large European presence at the Paris Air Show in 2001. However other Board members led by Dick Evans preferred the U.S. route, leaving Mr Weston out in the cold (aptly as he was removed after a skiing holiday!)from his colleagues and eventually, for whatever reasons, out of the company.

A merger with EADS has also been ruled out. Interestingly enough a 2003 study found that in their JVs 67% of EADS Turn Over was with BAE whilst only 25% of BAE’s was in EADS JVs. Merger discussions between BAE and EADS were well down the road until the Marconi purchase propelled BAE into the electronics segment although since that time the company has failed to build on this expertise and segment and has begun to divest itself of a large part of the former Marconi empire. There are two perceived explanations for this outcome, one being that the main board at BAE seemed to keen to concentrate its time on Major Platform Integration Projects and Project management, leaving the management and production of the sub-systems business to Managers without a Boardroom position. If it doesn’t fly or create a billion pound programme, ignore it! The other problem was that the late great Lord Weinstock much preferred the Government to fund any R&D and expertly extracted huge sums of money, particularly for the Nimrod AEW project when his company had received £350m (75% of the project) prior to its cancellation! One of Peter Levene’s tasks as CDP was to end this cosy arrangement of never ending cost-plus contracts landing at GEC’s door. He succeeded to the point of ending these but also cut off a major part of the UK’s R&D cashflow which Weinstock was unwilling to fill from his cash coffers, some £4bn before John Mayo and Lord Simpson blew it in spectacular style plus another£4.5bn!

Thus when BAE inherited the GEC businesses the product range was old and only a few items were Government funded such as the Typhoon radar. This was brought out in the complaints raised by European industry, Rolls-Royce in particular to the GE-Honeywell merger. It was found that none of BAE’s product range competed in the technology offered by the required merger. The Avionics segment results issued today reflect this performance with it contributing £1127m in 2003 and £1103m in 2004 with negative cash flow. Finmeccanica will inherit £780m of turnover and £33m of profit leaving the rump with negative profit prospects. George Rose, Finance Director said that the rump would be absorbed into the US Business where part of it already resides. BAE retains 25% of the Avionics Business within Eurosystems and substantial cash of £630m on completion. Eurosystems inherits 75% the Captor Typhoon radar plant in Edinburgh and any future sales, whilst the future Franco-UK radar project ESCAN is only at a development stage with no actual contract agreed for development. Thus it appears good sense for BAE to dispose of its avionics and other electr

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