Stand (Where You Are) and Deliver!
BAES & General Dynamics

Late October produced a banner headline in the Financial Times stating, "General Dynamics quits BAE talks." The essence of the article was that background talks on some form of merger or buy-out between the two had hit a brick wall, and the US giant was walking away. Now, it was stated that these were exploratory talks – there was no question of anything as strict as due diligence between the two – but that the two were talking came of little surprise to Defence Analysis readers. We have stated for many months now that the best fit transatlantically is between these two companies. But what might be the reasons behind the end of substantive talks between them?

• GD is unimpressed with the terms of a deal with BAES. It is possible that the talks – over a glass or two, possibly with international football matches on a TV in the background – ran into problems over the exact terms of a merger or a buy-out. Could it be that there were arguments over valuations, who might get what in the case of a merger, and who would gain control? Think of the horse-trading that went on when EADS tried to woo Alenia for the now-defunct EMAC and you get the idea. Perhaps at this stage the two could not see eye-to-eye, or both were negotiating too toughly for a middle ground to be found.

• GD is not yet impressed with BAES's shape and capabilities. It would be far from surprising to discover that GD was concerned about the status of what should be BAES's core Programmes division. Billion dollar writeoffs are rarely the sign of a happy and healthy business. A company could well find it difficult to persuade a suitor that the loses and programme delays and technical problems with both of the Nimrod MRA4 and Astute SSN add up to a solid basis on which to do business. Yes, BAES has a portfolio that looks attractive to an acquisitive a company such as GD – but only when it is making money, and can demonstrate that it will reliably continue to do so.

• GD isn't that interested in the North America Business. Is there any evidence that GD was a fevered bidder for those divisions that BAES bought in the earliest years of this decade? Defence Analysis cannot discern much evidence of this. In which case, the tales that there could be no agreement on hiving off these businesses were simply a smokescreen, an attempt to get some cold comfort from a bleak result. Ultimately, for a company so keen to buy European companies, GD is more interested in the long run in BAES's UK/European aspects.

• GD is not impressed with the terms of trade in the UK. There was a comment in the Financial Times article, which we must assume came from a GD "official". With regard to the state of the UK business, the official said, "'Have you ever seen the film Brazil?' – a film where any initiative is stymied by over-weening and wrong-headed bureaucracy." At first glance this comment looked as if it simply referred to the state of BAES – and this might actually be the case. But then … might it not actually refer to the state of UK defence business as a whole?

  Certainly, many who read the article said that they took it as a comment about the MoD. Which makes one wonder whether GD is taking a very long, hard, serious look at its exposure to the UK market. Yes, the UK is the fastestgrowing and largest open defence market in Europe. But are the terms of trade simply too onerous for GD to wish to increase its exposure? Is the cost of running competitions too high? Are the profit margins, especially when compared to the USA, let alone those from Santa Barbara in Spain, just too low?

  Is GD feeling the first twinges from the Bowman programme where, if MoD and GD UK are to be believed, to a greater or lesser extent, GD is having its toes held to the fire? But if the issue here is that if GD is decidedly unimpressed with the UK's terms of defence trade UK, then some at the MoD and the DPA really ought to take notice – it isn't just BAES that complains of this. And if GD is willing to some extent to walk away from the UK, then that would be a beacon warning to the MoD.

  Defence Analysis believes, miracles apart, that there is not likely to be any significant transatlantic deal for BAES in the next two years – possibly a few years more. Until BAES can demonstrate that it can deliver in its core market, the UK, it cannot prove itself as a valuable addition to a US firm's shot locker. Anyone who forgets this is making a big mistake – what makes BAES attractive to a US company is its position in the UK, Europe and some export markets, not the North America businesses.

  Once Nimrod MRA4, Astute SSN, and Typhoon can be shown to be revenue earners, then there is a prospect of American suitors beating a path to BAES's front door. And, as a further thought, with the growing problems regarding technology transfer agreements, as well as ITAR waivers, and all the malarkey that is accompanying proposed "Buy American" acts, is this really the time to initiate transatlantic mergers, when it is still uncertain how many real synergies will be permitted by restrictive legislatures?

• UK Defence Budget Troubles
• Future Strategic Tanker Aircraft Competition
• South West One: An Occasional Column About Whitehall, Westminster, and their Distant Dominions
• Balancing Politics of UK Procurement
• UK Defence Budget
• Keeping up the Strain
• Fighter Aircraft Market
• BAES and General Dynamics
• British Army Future Rapid Effects System
• Contractor Procurement Options
• Future Combat System Doctrine
• DEFENCE INDUSTRY NEWS
• ARMED FORCES NEWS
• DEFENCE COSMO

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