BAE Systems

BAE Systems plc is the world's fourth largest defence contractor"Defense News Top 100". DefenseNews.com. Retrieved 30th May 2006 and a commercial aerospace manufacturer. BAE is a British company based at Farnborough, which has extensive worldwide interests, particularly in North America through its subsidiary BAE Systems Inc. BAE was formed on 30th November 1999 with the merger of British Aerospace (BAe) and Marconi Electronic Systems (MES), the defence arm of The General Electric Company (GEC). As the result of this merger, BAE systems is the successor to many of the most famous British aircraft, defence electronics and warship manufacturers.

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

The British Aerospace/Marconi Electronic systems merger was agreed to on April 27, 1999. MES was acquired by BAe for Â£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."GEC confirms BAe merger talks." BBC News. Retrieved 8th December 2005 The attraction of MES may well have been Tracor, acquired by GEC in 1998, which was the largest European defence purchase in the United States at that point. Following the BAe/MES merger, 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 with what would have been an Britishâ€"German firm, made the possibility of penetrating the US defence market more likely. Since then, the company has steadily increased its investment in and revenues from the US. At the same time, 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.

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.

BAE Systems inherited the "special" shareholding that was established when British Aerospace was privatised. This special share, with a nominal value of Â£1, is held on behalf of the Secretary of State for Trade and Industry. This shareholding prevents amendments of certain parts of the company's Articles of Association without the permission of the Secretary of State."BAe and Thompson-CSF SA: A report on the proposed merger"." Competition Commission. Retrieved December 8, 2005. These Articles require that no foreign person or persons acting together may hold more than 15% of the company's shares or control the majority of the board; the CEO and the Chairman of BAE Systems must be British nationals.

Products

BAE Systems is a partner in the F-35 Lightning II programme

BAE Systems either leads or has a major stake in some of the world's most high profile, high technology aerospace, land warfare and maritime projects. BAE Systems' interests in commercial aviation are vested in Airbus SAS and BAE Systems Regional Aircraft. BAE's former Airbus division was transferred to the newly created "Airbus Integrated Company" in 2001 in return for a 20% share of the new company. As Airbus UK, this division manufactures the wings for the entire Airbus family, the A300, A310, A318, A319, A320, A321, A330, A340, A350, A380 (right) and A400M. BAE Systems is currently considering the disposal of this stake."BAE Systems to sell Airbus stake." BBC News. 6th April, 2006. BAE Systems Regional Aircraft no longer produces aircraft, however it continues to lease and support its products, the Avro RJ/BAE 146 family, BAe ATP, Jetstream and BAe 748. BAE plays important roles in miltary aircraft production. The company's Eurofighter Typhoon, Panavia Tornado and Harrier fighter-bombers are all front line aircraft of the Royal Air Force. BAE is a major partner in the F-35 Lightning II programme. Its Hawk advanced jet trainer aircraft has been widely exported.

BAE Systems Land Systems manfactures the British Army's Challenger II, Warrior Tracked Armoured Vehicle, M777 howitzer, Panther Command and Liaison Vehicle and L85 Assault Rifle. BAE Systems Land and Armaments (formerly United Defense) manufactures the M2/M3 Bradley fighting vehicle family, the United States Navy Advanced Gun System (AGS) and the M109 Paladin.

Major naval projects include the Astute class submarines, the Type 45 air defence destroyer and the future aircraft carrier.

Recent events

With BAE's Â£2.5 billion purchase of United Defense in 2005 BAE added the M2/M3 Bradley family of armoured vehicles to its product line.

In December 2005, BAE announced the sale of its German naval systems subsidiary, Atlas Elektronik, to ThyssenKrupp and EADS. On January 31, 2006 BAE announced the sale of BAE Systems Aerostructures to Spirit AeroSystems, Inc.

On 23rd March 2006 BAE and VT Group announced to the stock exchange that they were considering a joint bid for Babcock International. On 10th May BAE Systems abandoned the plan because "the economics of a deal do not create sufficient value for BAE Systems or the other parties" " BAE and VT pull out of Babcock bid" www.telegraph.co.uk Retrieved 14 May 2006

On 6th April 2006 BBC News reported that BAE was selling its 20% share of Airbus. If BAE was to sell its 20% stake in Airbus EADS is the most likely buyer, as it already owns 80% of the company. BAE originally sought to agree a price with EADS through an informal process. However due to the slow pace of negotiations and disagreements over price, BAE exercised its put option which saw investment bank Rothschild appointed to give an independent valuation. Following the announcement in June 2006 that Airbus would delay deliveries of the A380 by up to seven months reports appeared questioning the impact on the value of BAE's share of Airbus. The Independent described a "furious row" between BAE and EADS, with BAE believing the announcement was designed to depress the value of its share. BAE launches attack on EADS over Airbus superjumbo warning The Independent. Retrieved 15th June, 2006 On 2nd July 2006 Rothschild valued BAE's stake at Â£1.9 billion (â‚¬2.75 billion); well below BAE's, analysts' and even EADS' expectations. "BAE under pressure to hold Airbus stake" The Guardian Retrieved 3 July 2006

One of BAE's major aims, as highlighted in the 2005 Annual Report, was the granting of increased technology transfer between the UK and the US. The JSF programme became the focus of this effort, with UK minister's suggesting it would withdraw from the project with the transfer of technology that would allow the UK to operate and maintain F-35s independently. On Friday 27th May 2006 President Bush and Prime Minister Tony Blair issued a joint statement which announced:"Both governments agree that the UK will have the ability to successfully operate, upgrade, employ, and maintain the Joint Strike Fighter such that the UK retains operational sovereignty over the aircraft." Bush gives way over stealth fighter. Financial Times. Retrieved 27th May 2006

Corporate information

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 Hornet, the Boeing 757 and Boeing 767 commercial jets. Another acquisiton was Lockheed Martin Aerospace Electronic Systems, completed in November 2000.

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 (Â£4.1bn) hostile bid for TRW in February 2002. A bidding war between BAE, Northrop and General Dynamics ended on 1st July 2002 when Northrop's increased bid of $7.8bn (Â£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 Â£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."BAE shares boosted by merger talk." BBC News. 8th December 2005. 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."BAE shares rise after sales talk." BBC News. 8th December 2005. As of 2006 the more likely move for BAE Systems' shipbuilding operations is their merger with other British shipyards to form a "Newco" shipbuilding company.

On 4th June 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 7th March 2005 BAE Systems announced the $4.192 billion (Â£2.25 billion) acquisition of the USA 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 â‚¬300 million, but was blocked from purchasing Atlas on national security grounds."BAE forced into cut-price sale." Financial Times. Retrieved 3rd January 2005. On 31st January 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".Fears for future of BAE plant BBC News. Retrieved January 31, 2006 On 16th March 2006 the Financial Times reported the possible sale of BAE's 37.5% share of MBDA. The paper reports that EADS is keen to take full control of the joint venture by acquiring the BAE share and Finmeccanica's 25%."MBDA prepares for consolidation." Financial Times. Retrieved 18th March 2006.

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 27th January 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 3rd May 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 its 20% share of Airbus SAS.

In a prospective look at aviation in 2006 The World in 2006, an annual publication by The Economist, predicted that BAE Systems was 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.Carson, I. (2005) "Beware the boom: Aerospace orders will come down to earth" The World in 2006" pp. 130-132

In March 2006 reports in the UK media intensified about the possibility of a sale, with BAE's 20% "conservatively valued" at â‚¬3.5 billion EUR (Â£2.4 bn GBP or $4.17 bn USD). Despite denials by the company the BBC reported on 6th April 2006 that BAE was indeed to sell its stake, likely to partner EADS. The move was seen by many analysts as a move to make partnerships with USA firms more feasible, in both financial and political terms."BAE in Talks With EADS to Sell its 20% Airbus Stake; British Firm is Focusing Increasingly on Defense Market, Especially in U.S." Michaels, D. The Wall Street Journal''. 7th April 2006.

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, 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 1st July 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.""BAE's Olver demands 'root and branch' change." The Guardian. 8th December 2005.

Reports in 2005 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.""BAE chief admits clashing with chairman over Europe." Daily Telegraph. 8th December 2005.

Financial information

**Table 1** BAE Systems five year results (source BAE Systems Annual Report 2005)
Year ended	Turnover (Â£m)	Profit/(loss) before tax (Â£m)	Net profit (Â£m)! Earnings per share (p)
31 Dec 2005^[i]	15,411	845	555	22.5
31 Dec 2004^[i]	13,222	730	3	17.4
31 Dec 2003	15,572	233	8	16.6
31 Dec 2002	12,145	(616)	(686)^[ii]	17.3
31 Dec 2001	13,138	70	(128)	23.4

[i]: IFRS. 2003, 2002 and 2001 data prepared using UK GAAP procedures.
[ii]: Reflects Â£750 million charges for problems with Nimrod MRA4 (Â£500m) and Astute class submarine (Â£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."Negative ratings watch for BAE." (Nov 19, 2004) Financial Times

Merger undertakings

Various undertakings were given by BAE Systems in 2000 to the Department of Trade and Industry which prevented a reference of the merger to the Monopolies and Mergers Commission (now the Competition Commission).Merger undertakings BAE Systems release. Retrieved December 8, 2005. 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.#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.#BAE Systems must competitively tender sub-contracts, i.e. the new subsidiaries must not automatically receive sub-contracts.#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. #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."OFT to review BAE Systems undertakings." Office of Fair Trading press release. February 9, 2006.

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 Â£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 Â£1m to Augusto Pinochet, the former Chilean dictator. "Revealed: BAE's secret Â£1m to Pinochet." The Guardian. December 8, 2005.

Criticisms

Like many arms manufacturers BAE has recived criticism from various human rights and anti-arms trade organisations due to the human rights records of governments it has sold equipment to. These include Indonesia, Saudi Arabia and Zimbabwe.