The merger of British BAE Systems with French giant EADS finds the government at a tricky crossroads for the future of the UK’s defence industry. Although merging with EADS threatens to rip the heart out of Britain’s largest defence firm, BAE has little choice. The firm has suffered from spending cuts on both sides of the Atlantic — 98 per cent of BAE’s business originates from the defence market and orders are in decline. Therefore a merger appears to be the obvious solution, allowing BAE to diversify and secure its future. But as the world’s third largest defence contractor, any kind of dilution of BAE has security and strategic implications.
Although in some respects merging with EADS is a regular business transaction, the importance of the deal means that Westminster will make the final decision. The government’s ‘golden share’ in BAE means they can nail the deal at any stage if they decide to. As the former defence secretary John Reid said on the Today programme this morning, the merger will be a ‘huge call’ for the government on not just the future of our defence industry, but also our trading relationship with the United States:
‘There may will be cost savings, there may well be efficiency. But the status quo – ie the two companies staying separate – won’t stave that off. Particularly for BAE systems who are working in a defence market that’s not just shrinking in the United Kingdom, it’s also shrinking through the world.
‘There are those who would say you have to regard the BAE Systems entry and growth in the American market as very important as well. So we have to deal with the complexities of not only the French and the Germans and the British, but also how the American government would regard their intellectual property, of you like, the investment that they’re making – now about £7bn worth of orders I think BAE systems gets.’
This situation recalls another juncture the British government once faced over a pan-Europe defence merger — 1986’s Westlands affair. Then-defence secretary Michael Heseltine resigned from the cabinet due to Margaret Thatcher’s refusal to consider merging the UK helicopter firm Westlands with a European partner instead of the American firm Sikorsky. The Americans won then, but the French are the only option in today’s dilemma. Over half of BAE’s business lies in the US, so if the Pentagon is uncertain of the merger, the British government may have no choice but to invoke its ‘golden vote’ to veto the proposal. BAE must therefore convince America that it would be a safe and advantageous decision.
The other similarity with the Westlands affair is what the BAE-EADS decision says about our European future. If the British government allows the two firms to become one, it will send a clear signal that David Cameron’s government is confident of a strong trading future with Europe.
If the deal is blocked, it will suggest that the government is not so keen to hand over vital defence work to European partners. But as Allister Heath argued in his City AM column yesterday, the merger could be an ‘exciting transaction’, providing business for the City and backing to take on some of the bigger US contractors. Before that, it is up to BAE Systems to assure governments around the world that the ethos and competence behind one of Britain’s globalisation success stories remains intact.
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