BAE and EADS in merger talks as Woodford site closes

September 13, 2012

by Tudor Rickards

As someone living close to Woodford aerodrome, the proposed merger of BAE and EADS [announced September 13th, 2012] had more than professional interest for me.

Last rites

Each morning, I drive or walk past the little airfield at Woodford in Cheshire, where BAE systems has conducted part of its aerospace business for many years. From time to time, sleek military aircraft would swoop past above. Transporters, each carrying one wing for the mighty Airbus, would trundle down Woodford Road, which had its plastic road furniture regularly removed and then replaced to permit easier access to the site. Each year, a flying show featuring Britain’s most loved aircraft blocked the roads around the village.

Now, only glimpses are to be seen of the last rites. Construction has been replaced by dismantling of aircraft such as the Nimrod shown in the image above.

Planning permission

Woodford aerodrome is now waiting for planning permission before conversion to new build which would produce private housing and mark the end of such commercial activities. While BAE systems faces the most serious job-losses, the site occupies a slice of aeronautic history going back to 1910. Local residents are still involved in community discussions.

Creating a global giant

At a strategic level, the merger between the two organisations has considerable face appeal. Woodford is probably of little significance in the wider scheme of things.

Dealbook, a New York Times publication, reported the news that the merger of the two biggest European aerospace and defence companies would create a global giant with a combined market value of nearly $50 billion.

“On the face of it this will create one of the largest aerospace and defense organizations on the planet,” said Guy Anderson, a senior defense industry analyst with IHS Jane’s in London, who added that the combination would “change the European defense market beyond recognition.”

Shares of BAE Systems rose 10.8 per cent by the end of trading in London on Wednesday [12th September 2012], while shares of EADS were down 5.6 per cent.

BAE and EADS (for European Aeronautic Defense and Space) have a history of collaboration. They are partners on a number of projects, including the Eurofighter jet. BAE also held a direct interest in the Airbus consortium for many years before selling it back to EADS in 2006.

The deal could give the two companies more lobbying muscle to compete with Boeing and other American military companies. BAE already has a strong presence in the United States, but EADS has had only limited success with American military contracts. Last year, the company lost a coveted $35 billion Air Force contract for aerial refuelling tankers to Boeing.

Regulatory Hurdles

Any deal would face its share of regulatory hurdles. The European Commission would have to approve the merger. The American government might also weigh in on the transaction. BAE’s Sanders unit could especially face scrutiny.

Leadership issues

The merger will bring with it some complex leadership issues. EADS over the years has been involved in many tortuous strategic decisions as the competing pressures from French and German stakeholders played out. Government involvement will now be compounded by British political interests.

Leaders We Deserve will be among the millions of interested parties watching the situation as it develops. Maybe, just maybe, for local residents and BAE employees there is renewed hope for a sensational last-minute change of plans for the Woodford site.


BAE Faces Global Challenge

October 2, 2009

bae

BAE Systems faces a major leadership challenge over international contracts. How serious is the threat, and how might BAE Systems differ from other globally trading organizations?

A long-running story broke this week [Oct 1st 2009]. British anti-fraud prosecutors intend to pursue a case against BAE Systems, the world’s No. 2 defense contractor, on charges of corruption in dealings on foreign contracts worth hundreds of millions of pounds.

Prosecutors said they will seek permission from Attorney General Patricia Scotland to pursue the case against BAE, which is Britain’s largest manufacturer. In a statement, BAE Systems said it “continues to expend considerable effort seeking to resolve, at the earliest opportunity, the historical matters under investigation by the SFO.”

The cases involve alleged secret payments on sales of a military radar to Tanzania; alleged bribes behind a Czech deal to lease Anglo-Swedish Gripen warplanes; payments allegedly made on a sale of two frigates to Romania; and 100 million pounds ($160 million) in allegedly secret payments in a weapons deal with South Africa.

Christopher Grierson, a partner in the bribery and corruption taskforce at Lovells LLP international law firm, said the SFO’s decision would shake British business.

“The sheer scale of the penalties being sought, which are believed to be 1 billion pounds ($1.6 billion), is unprecedented in the U.K. and will send shockwaves across corporate Britain” END

Make no mistake. There are considerable problems and adverse publicity facing BAE in the coming months. Public awareness of Corporate Governance issues has been raised over the last year or so with the high-profile financial scandals.

Background

Background briefing reveals how the story can be treated in quite different ways. The Guardian sees the annoucement as vindication of its campaign against what it sees as corporate corruption supported by the British Government. In contrast, The Mail sees evidence of an anti-Capitalist plot.

The Guardian editorial put it this way

Last time BAE Systems was threatened by justice in 2006, it wriggled free with the aid of a personal minute from Tony Blair. His questionable claim was that throwing the book at these merchants of war would threaten lives on British streets. The pressure on the Serious Fraud Office to drop its probe into the firm’s Saudi dealings amounted to – in the words of the high court judge who reviewed the case – “a gun held to the director’s head”.

Peter Oborne in The Daily Mail writes:

Fifty years ago Britain could still boast a magnificent and proud industrial base, but today we only have two truly world class manufacturing giants.

The first of these is the superlative pharmaceuticals conglomerate Glaxo and the second is the great defence contractor British Aerospace.

yesterday’s news that the Serious Fraud Office wants BAE to be prosecuted for corruption is not just a calamity for the company, its shareholders and the men and women who work for it.

It is also a national disaster, with devastating consequences for British domestic employment, overseas earnings, and our standing throughout the world. It is doubtful whether BAE could easily survive paying the £1billion fine that the SFO is reportedly demanding, nor the massive reputational damage that would result.

Of course, we would all have to stomach this national calamity if BAE really was corrupt and a disgrace to Britain. No one can condone corruption. But is BAE really corrupt? Or is it about to become the victim of a gross miscarriage of justice?

Oborne goes on to suggest that BAE Systems is operating globally where one culture’s incentives is another culture’s corruption.

The BBC analysis

As usual, Robert Peston offers an informed overview:

BAE, Britain’s biggest manufacturer, would dearly like to make a limited admission of guilt, pay a fine and move on. It would love to settle the case by plea bargain and turn over a new leaf, to use the cliché.

That’s wholly rational, in that most of the senior executives of the company weren’t with the business in the period when, by its own admission, it wasn’t as scrupulous in its business practices as it would now like to be. But its directors have a legal duty not to hand over cash or damage the reputation of the company – through what would be seen as a confession of wrongdoing – unless they are advised by their own lawyers that the SFO has an overwhelming case.

A Case for Analysis

The case offers much for analysis. The Guardian and The Mail have been useful starting points as wirnesses for the prosecution and for the defense. Might it be possible to apply a little more creative thinking to provide advice for the future of BAE Systems, and implications for global organizations in general, and Governments, based on the case?

Other Perspectives

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