Graham Warwick/WASHINGTON DC
BAE Systems' plan to acquire US electronic warfare (EW) specialist Sanders will be a true test of the USA's expressed desire to promote transatlantic industrial co-operation.
The "black art" of electronic warfare is a sensitive technology and Sanders is at its heart, developing the EW system for the US Air Force's stealthy Lockheed Martin/ Boeing F-22 Raptor, as well as for the US Navy's F/A-18E/F Super Hornet and other key US military aircraft.
Sanders is the largest part of Lockheed Martin's Aerospace Electronics Systems (AES) business, which BAE has agreed to acquire for $1.67 billion in cash. The purchase follows hard on the heels of the UK company's April agreement to buy Lockheed Martin's Control Systems business for $510 million.
If both deals go through as planned, BAE Systems North America will grow from its current $2.5 billion in revenues to almost $3.77 billion, based on the 1999 sales of the two Lockheed Martin businesses. This will put the UK company in first position in the global league table of defence manufacturers and rank its US operations alone as one of the world's top 10 defence companies.
The company's North American workforce, boosted by 17,000 people to its current level of around 18,000 when British Aerospace merged with Marconi Electronic Systems last year, will grow to 23,000 with the addition of the Lockheed Martin units.
Both acquisitions complement BAE's established electronic systems business. Control Systems will give the UK company domination of the military market for fly-by-wire flight controls, adding systems for the F/A-18E/F, F-22, Bell Boeing V-22, Boeing C-17, Saab/BAE Gripen and Samsung/ Lockheed Martin T/A-50 to the UK company's Eurofighter and Boeing 777 programmes.
As well as Sanders, which specialises in self-protection and mission planning systems, the sale brings to BAE infrared sensor specialist Fairchild Systems. All three product areas are already core capabilities of the UK company. The third element of AES is the Space Electronics & Communications business, which make radiation-hardened digital components for spacecraft.
The deal represents a coup for BAE and a windfall for Lockheed Martin. "This acquisition strengthens BAE Systems as a major player in the global defence market," says chief executive John Weston, while his Lockheed Martin counterpart Vance Coffman says: "This transaction advances our strategic initiatives to refocus the corporation, generate cash and reduce debt."
It is in the interests of both companies, therefore, to consummate the transactions as quickly and as smoothly as possible. The Control Systems deal has attracted no overt criticism and is expected to be completed on schedule in the third quarter. Reaction to the AES deal appears positive - or at least neutral - so far, but the transaction is likely to attract far greater scrutiny because of the security issues involved.
BAE and Lockheed Martin are not playing down the importance of satisfying US security concerns, but believe US moves to promote transatlantic industrial co-operation by lowering the technology transfer hurdles, particularly to the UK, bode well for the deal.
Industry on both sides has been arguing for some time that transatlantic co-operation is the best way to close the capabilities gap between US and European NATO forces highlighted by the Kosovo conflict. Traditionally, the barriers to transatlantic co-operation have been the USA's draconian export controls and Europe's closed defence market.
Now the US Government has moved to expedite technology transfer to its allies, in the hopes of achieving improved military interoperability through greater industrial co-operation.
Lockheed Martin believes the BAE transaction will promote interoperability between US and allied forces. "By advancing transatlantic industry consolidation, as US defence leaders have recently urged, we are confident we will receive all necessary government approvals in a timely manner," says Robert Coutts, executive vice-president of Lockheed Martin's Systems Integration business, of which AES is part.
BAE has worked on sensitive US military contracts under a special security agreement for the past 10 years without problems, but has never worked on special access - or "black" - programmes, which Sanders undoubtedly has. The approval process is likely to be rigorous. "We are proud of our security record, which I believe is among the best in the industry," says Mark Ronald, president of BAE Systems North America.
Security issues aside, the AES deal is the realisation of a strategy Weston outlined in a speech in the USA in May, when he described BAE Systems as "the European company with the strongest representation in America and the US company with the strongest representation in Europe".
Explaining that BAE prefers to have full control of its businesses, and therefore is "not keen" to expand its range of joint ventures with European firms, he said there is "no doubt" the company sees opportunities in the USA "as much more significant over the next few years than in Europe".
Weston also sees "significant drawbacks" in transatlantic joint ventures and strategic alliances - as proposed by other US and European companies - because of the management challenges they present.
"Undoubtedly transatlantic mergers have the best potential for producing the cost savings needed to convince the markets that the risk and managerial complexity are worth it," he says.
BAE is now putting Weston's thoughts into practice, in the first real test of the new environment of transatlantic co-operation.
Source: Flight International
