BAE must show that tie-up won’t damage national security

 
Allister Heath
GOVERNMENTS and defence companies are inextricably linked. There is no free market in military equipment, of course, as governments are the buyers; there is less – but still lots of – political intervention in civil aviation, where governments often lobby on behalf of planes produced by companies or factories located in their country.

So the spectacular, historic planned merger between BAE Systems – the old British Aerospace, Britain’s top military manufacturer – and EADS, owner of Airbus and a pan-European company in which the French and German states have an interest – is very far from a normal business deal. Regardless of whether the financials remain as planned, and regardless of whether shareholders decide to back the deal, the real decision-makers behind this deal will be politicians – not just in the UK, France and Germany but also crucially in the US.

There are many concerns about the proposed merger, some legitimate, others less so. EADS shareholders would own 60 per cent of the new firm; BAE ones just 40 per cent; so this could be a takeover of sorts, despite a number of proposed safeguards, including special shares issued to the UK (and German and French) government. National security is the core job of governments; so it is essential that the UK government be comfortable that the merger would continue to ensure this and that Britain would not lose any more of its military independence as a result of the deal, or be excessively dependent on other nations. Usually, “national security” is a nonsensical protectionist excuse to stop a deal; but in defence matters such concerns do need to be addressed carefully.

The next key point is whether this deal – the creation of a pan-European defence giant, deliberately intending to take on the US, and the decision to subsume the majority of the UK’s capabilities into this – will end up binding Britain into a permanent defence alliance with France, Germany and the rest of the Eurozone. Is this a pure business transaction – or is it a means of building the European project, with the implicit support of the Foreign Office? I’m sure BAE would see it as a pure business deal, and its shareholders clearly like it, or else its stock price wouldn’t have jumped by 11 per cent. But some politicians won’t see it that way, even though the massive defence spending cuts of recent years are one of the reasons driving the tie-up.

But given that the UK electorate will soon have to decide whether it wants to take part in ever closer EU unification, or whether it wants Britain to reject EU political integration and remake itself as a global trading nation, this deal is far more sensitive than it may look at first glance.

The next question is what the US government, on which BAE depends massively for contracts and which, in an exceptional move, has granted the UK group similar privileges and contractor status as it affords the biggest American companies, thinks of the deal. It is clear that EADS wants to use BAE to take on Boeing and other US giants; it has so far failed miserably to sell to the Pentagon. But given that defence is not about real capitalism, will the Americans want to do business with Germany and France? The Pentagon could easily kill this deal by threatening to terminate its relationship with the enlarged group.

This is an exciting transaction for the City, with huge and much-needed fees on the table. There may be an excellent business case for the BAE-EADS tie-up, and it may be that there are no national security implications for the UK. But BAE needs to make that case loud and clear.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath