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BAE Systems

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BAE Systems plc
Company typePublic (LSE: BA)
IndustryAerospace and defence
FoundedNovember 30, 1999
HeadquartersFarnborough, Hampshire
Key people
Dick Olver, Chairman
Mike Turner, CEO
ProductsCivil and military aerospace
Defence electronics
Naval vessels
Munitions
Land warfare systems
Revenue£13.479 billion GBP (2004) [1]
1,740,000,000 pound sterling (2016) Edit this on Wikidata
938,000,000 pound sterling (2016) Edit this on Wikidata
Total assets22,980,000,000 pound sterling (2016) Edit this on Wikidata
Number of employees
90,000 (40,000 in UK)
Websitewww.baesystems.com

BAE Systems plc is the world's fourth largest defence contractor [2] and a commercial aerospace products manufacturer. BAE is a British company based at Farnborough, UK which has extensive worldwide interests, particularly in North America through its subsidiary BAE Systems Inc. BAE was formed on November 30, 1999 with the merger of British Aerospace (BAe) and Marconi Electronic Systems (MES), the defence arm of The General Electric Company (GEC).

History

Evolution of UK aviation, 1955 to BAE Systems formation in 1999 (includes naval acquisitions)
Evolution of the land systems division of BAE Systems, 1970s to Land & Armaments formation

Formation

The British Aerospace/Marconi Electronic systems merger was agreed on April 27 1999. MES was acquired by BAe for £7.7 billion.

It was widely anticipated that BAe would merge with Germany’s DASA to form a pan-European aerospace giant, however BAe chose instead to merge with GEC’s defence electronics business.[3] Following that decision, DASA instead merged with Aerospatiale to create the European Aeronautic Defence and Space Company (EADS). This group was joined by Spain’s CASA following an agreement in December 1999.

The creation of what could be described as a UK company compared to what would have been an Anglo-German firm, made the possibility of penetration of the United States (US) defence market more likely. Since then the company has steadily increased its investment in, and its revenues from, the US, while continental European companies have made limited moves into that massive market. Major European companies such as Thales and EADS are unlikely to ever be awarded, for example, a position relative to BAE Systems' involvement in the F-35 Joint Strike Fighter programme.

BAE Systems inherited the "special" shareholding that was established when British Aerospace was privatised. This special share, with a nominal value of £1, is held on behalf of the Secretary of State for Trade and Industry. This shareholding prevents amendments of certain parts of the Articles of Association without the Secretary of State's permission.[4] These Articles require that no foreign person or persons acting together could hold any more than 15% of the company's shares, the majority of the board must to be British citizens and the CEO and Chairman of BAE Systems must be British.

In the company's 2003 Annual Report Sir Richard Evans sums up BAE Systems' strategy since the Marconi merger:

In recent years BAE Systems has undergone a radical transformation from a UK-based aircraft manufacturer to a broadly-based systems business. Through this transformation the company has achieved a more balanced portfolio and geographic spread.

Merger undertakings

Various undertakings were given by BAE Systems in 2000 to the Department of Trade and Industry which prevent a reference of the merger to the Monopolies and Mergers Commission (now the Competition Commission). [5] Ordinarily merger decisions are taken by the European Commission, however EC Merger Regulation Article 296 allows member states to take any decisions relevant to national security. The EC granted its approval of the non-military aspects in June 1999.

  1. The MES shipyards and Marconi Avionics were to be kept as subsidiaries of the new company, with independent financial accounts. Further these subsidiaries must be available to all potential prime contractors (i.e. including external companies) on equal terms.
  2. BAE Systems must competitively tender sub-contracts, i.e. the new subsidiaries must not automatically receive sub-contracts.
  3. Due to the competition of British Aerospace and MES in various major defence projects, the company was ordered to set up various "firewalls" to prevent interaction between the former MES and BAe teams on those projects. An example of this was the initial stages of the Joint Strike Fighter programme where MES was involved in Boeing's X-32 project and BAe supported Lockheed Martin's X-35 bid. Other relevant projects were; the Future Scout & Cavalry System (FSCS)/TRACER Program (“FSCS/TRACER Program”), Skynet 5, Astute class submarine Training Programme and MES shipbuilding projects.
  4. A compliance officer was appointed by BAE Systems to ensure the new company followed these requirements and procedures. The remit of this job was strictly set out, including the qualifications (length of time with the company etc), access to staff and information, and independence.

In 2006 the Office of Fair Trading announced it had launched a review of the undertakings to determine whether "the undertakings are still appropriate or need to be varied or superseded, or whether BAE Systems can be released from them." This follows BAE questioning the "continued relevance of a number of the undertakings" given the changes in the defence industry since 2000. [6]

Major events since merger

File:M2Bradley-1.jpg
With BAE's £2.5 billion purchase of United Defense in 2005 BAE added the M2/M3 Bradley family of armoured vehicles to its product line.

With almost total consolidation of the defence industry on the European continent, BAE Systems turned its attention to North America, for example acquiring Lockheed Martin Control Systems, (LMCS) which produces controls for the B-2 Spirit bomber, the C-17 Globemaster strategic transport, the F/A-18, the Boeing 757 and Boeing 767 commercial jets.

In November 2001 BAE announced the closure of the Avro Regional Jet (Avro RJ) production line at Woodford and the cancellation of the Avro RJX, an advanced series of the aircraft family. The final Avro RJ to be completed became the last all-British civil airliner. BAE continues to support operators of its products through BAE Systems Regional Aircraft.

In June 2002 BAE confirmed it was in takeover discussions with TRW, an American aerospace, automotive and defence business. This was prompted by Northrop Grumman's $5.9 billion (£4.1bn) hostile bid for TRW in February 2002. A bidding war between BAE, Northrop and General Dynamics ended on July 1 2002 when General Dynamics increased bid of $7.8bn (£5.1bn) was accepted.

In December 2002 BAE issued a shock profit warning due to cost overruns of the Nimrod MR4 maritime reconnaissance/attack aircraft and the Astute SSN projects. BAE Systems took a charge of £750 million against these projects.

BAE has long been the subject of press reports linking it to major North American defence contractors, for example Boeing, Lockheed Martin and General Dynamics. The company's shipbuilding assets (and Airbus in the Boeing context) have been named as blocks to any merger. [7] The appeal of a link with a North American company is strong as the US defence market is by far the largest in the world. The company already has $9 billion worth of sales to the Pentagon and any further move into the North American market would yield yet more. This is particularly the case if BAE Systems can win prime-contractor status on a major project. BAE Systems faces considerably fewer hurdles in this sense than their European counterparts, as there is a high degree of integration between the US and UK defence establishments.

In May 2004 it was reported that BAE Systems was considering selling its shipbuilding division, the two Clyde shipyards and the Barrow-in-Furness yard. The company would only say that it was reviewing its operations. It was understood that General Dynamics would like to acquire the submarine building facilities at Barrow, while Vosper Thornycroft was said to be interested in the remaining yards. [8] As of 2005 the more likely move for BAE Systems' shipbuilding operations is their merger with other British shipyards to form a "Newco" shipbuilding company.

On June 4, 2004 BAE Systems outbid General Dynamics for Alvis Vickers. What had seemed a certain win for the US company was stopped by BAE Systems' surprise move. It has been seen as an attempt to keep such a strong competitor "at bay" in BAE Systems' "backyard." On March 7 2005 BAE Systems announced the $4.192 billion (£2.25 billion) acquisition of the United States defence company United Defense Industries (UDI). UDI, a major competitor to General Dynamics, is primarily a land systems manufacturer, boosting BAE Systems' involvement in this sector and its sales in the important North American market. UDI manufactures combat vehicles, artillery systems, naval guns, missile launchers and precision guided munitions.

In December 2005 BAE announced the sale of its German naval systems subsidiary, Atlas Elektronik, to ThyssenKrupp and EADS. The sale was complicated by the requirement of the German government to approve any sale as acceptable. The Financial Times described the sale as "cut price" due to the fact that French company Thales bid €300 million, but was blocked from purchasing Atlas on national security grounds. [9]

On January 31 2006 BAE announced the sale of BAE Systems Aerostructures to Spirit AeroSystems, Inc. BAE said as early as 2002 that it wished to dispose of what it did not regard as a "core business". [10]

Eurosystems

In July 2003 BAE Systems and Finmeccanica announced their intention to set up three joint venture companies collectively to be known as Eurosystems. These companies would have pooled the avionics, C4ISR and communications businesses of the two companies. The difficulties of integrating the companies in this way lead to a re-evaluation of the proposal, BAE's 2004 Annual Report states that "recognising the complexity of the earlier proposed Eurosystems transaction with Finmeccanica we have moved to a simpler model."

This revised agreement ("the Eurosystems Transaction") was signed on January 27, 2005. BAE and Finmeccanica announced the intention to dissolve their partnership in the AMS joint venture with AMS' UK and Italian operations to be taken over by the respective partners.

On May 3, 2005 the Eurosystems Transaction was finalised with:

  • the UK operations of AMS (minus air traffic control and communication systems) being brought together with the C4ISR division of BAE Systems (minus communication systems) to form the new Integrated System Technologies (Insyte) division of BAE Systems.
  • the communications systems portions of AMS and BAE Systems being sold to Selenia Communications, a division of Finmeccanica
  • the majority of BAE Systems Avionics and the whole of the avionics portion of Finmeccanica being brought together to form the new SELEX Sensors and Airborne Systems joint venture held by shares of 25% and 75% respectively, with the option for Finmeccanica to later purchase the remaining 25%.

Future of Airbus shareholding

Like reports of further possible North American mergers and acquisitions BAE has long been the subject of press reports regarding the future of it 20% share of Airbus SAS.

In a prospective look at aviation in 2006 The World in 2006, an annual publication by The Economist, predicts that BAE Systems is almost certain to sell its Airbus share in 2006 in order to fund another major U.S. acquisition (L-3 Communications is named as an "obvious candidate"). EADS has first refusal on the share and is the most likely to purchase it but the magazine states that the two partners discussed a sale in the summer of 2005 and were unable to agree a price. [11]

Bribery allegations

BAE (and British Aerospace previously) has long been the subject of allegations of bribery in relation to its business in Saudi Arabia (through the Al Yamamah contracts). The company has been accused of maintaining a £60m Saudi slush fund and is the subject of an investigation by the Serious Fraud Office. The UK National Audit Office investigated the contracts and has so far not published its conclusions - the only NAO report ever to be withheld.

The Guardian alleged in September 2005 that banking records show that BAE paid £1m to Augusto Pinochet, the former Chilean dictator. [12]

Financial information

Table 1 BAE Systems five year results (source BAE Systems Annual Report 2004)
Year ended Turnover (£m) Profit/(loss) before tax (£m) Net profit (£m) Earnings per share (p)
Dec 31 2004 13,479 (232) (466) 18.0
Dec 31 2003 12,572 233 8 16.6
Dec 31 2002 12,145 (616) (686)[i] 17.3
Dec 31 2001 13,138 70 (128) 23.4
Dec 31 2000 12,185 179 (19) 18.8

[i]: Reflects £750 million charges for problems with Nimrod MRA4 (£500m) and Astute class submarine (£250m) programmes.

Of all the company's activities the most profitable are the Al Yamamah contracts to supply and support the Royal Saudi Air Force. This deal contributes substantially to the company's profits, 42% in 2003. [13]

Corporate governance

As of November 2005 the members of the board of directors of BAE Systems are: Sue Birley, Phil Carroll, Ulrich Cartellieri, Chris Geoghegan, Michael Hartnall, Michael Lester, Peter Mason, Steve Mogford, Dick Olver, Michael Portillo, Roberto Quarta, Mark Ronald, George Rose, Mike Turner, and Peter Weinberg.

In late March 2004 after more than 30 years with the company (and its predecessors), BAE Systems' longstanding Chairman Sir Richard Evans announced his successor. Dick Olver, formerly the deputy chief-executive of BP, succeeded Sir Richard on July 1, 2004. This appointment came at a significant time with stock market confidence still recovering from the shock profit warning of December 2002.

BAE Systems' CEO is Mike Turner, who replaced John Weston in 2002. Weston was forced out in what was a surprise move. It is understood that Turner, like Evans, has a poor working relationship with senior Ministry of Defence officials, (for example with former Defence Secretary Geoff Hoon). Significantly the first meeting between Olver and Hoon was said to have gone well, a MoD official commented "He is a man we can do business with. We think it is good to be taking a fresh look at things." [14]

Reports in 2005 have suggested that relations between the Chairman (Olver) and CEO (Turner) are strained. In June 2005 Turner heightened investor concerns of boardroom tensions by crticising Olver's knowledge of the defence industry, "[he] has a low knowledge base and knows nothing about our industry". Turner did suggest however that Olver was on a learning curve, "He'll fully understand it [in 5 years]. This is a business that takes time to understand. It's not just business, it's political." [15]

Organisation

File:Bae.systems.777.750pix.jpg
Boeing 777 wing leading edge manufactured by BAE Systems

Joint ventures etc.

Products

BAE Systems either leads or has a major stake in some of the most high profile, high technology civil and military aerospace and maritime projects in the world. This is not a complete list, only major projects are included:

Air

1st flight of Airbus A380 "super-jumbo", the wings of which are supplied by BAE Systems
Challenger II main battle tank
File:Rn type 45.jpg
Type 45 Destroyer

Land

Sea

See also

References

  1. www.londonstockexchange.com
  2. ^ BAE Systems (2004) Annual Report 2005 Retrieved May 18, 2005
  3. ^ DefenseNews.com (2005) Defense News Top 100 Retrieved Sep. 5, 2005
  4. ^ BBC News (1999). "GEC confirms BAe merger talks". Retrieved Dec. 8, 2005
  5. ^ Competition Commission (1991) "BAe and Thompson-CSF SA: A report on the proposed merger" Retrieved Dec. 8, 2005
  6. ^ BAE Systems (1999) Merger undertakings Retrieved Dec. 8, 2005
  7. ^ Office of Fair Trading (Feb. 9, 2006) "OFT to review BAE Systems undertakings" (Press release)
  8. ^ BBC News (2003) "BAE shares boosted by merger talk" Retrieved Dec. 8, 2005
  9. ^ BBC News (2004) "BAE shares rise after sales talk" Retrieved Dec. 8, 2005
  10. ^ FT.com (Dec. 30, 2005) BAE forced into cut-price sale Retrieved Jan. 3, 2005
  11. ^ BBC News (2002) Fears for future of BAE plant Retrieved Jan. 31, 2006
  12. ^ Iain Carson (2005) "Beware the boom: Aerospace orders will come down to earth" The World in 2006" pp. 130-132
  13. ^ Guardian Unlimited (2005) "Revealed: BAE's secret £1m to Pinochet" Retrieved Dec. 8, 2005
  14. ^ "Negative ratings watch for BAE" (Nov 19, 2004) Financial Times
  15. ^ Guardian Unlimited "BAE's Olver demands 'root and branch' change" Retrieved Dec. 8, 2005
  16. ^ Daily Telegraph (2005) BAE chief admits clashing with chairman over Europe. Retrieved Dec. 8, 2005
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