EADS, BAE in ad­vanced merger talks

SP's MAI - - CORPORATE -

It will be one the largest ever acts of con­sol­i­da­tion in the arms and aero­space in­dus­try ever, cer­tainly the big­gest in Europe. The un­der-dis­cus­sion merger of de­fence and aero­space giants EADS and BAE Sys­tems, in dis­cus­sions at the high­est lev­els since ear­lier this year, has a dis­tinct In­dian con­nec­tion. It is widely be­lieved that Eurofighter’s run­ner-up loss in the In­dian medium multi-role com­bat air­craft (MMRCA) com­pe­ti­tion pre­sented not just phe­nom­e­nal dis­ap­point­ment for Eurofighter—a pro­gramme ad­min­is­tered by EADS and BAE Sys­tems to­gether—but also a larger in­flec­tion point. Fo­cus­ing much en­ergy on the twin Amer­i­can cam­paigns had failed to push the Ty­phoon across the fin­ish line, trumped as it was by its own Euro­pean cousin, the French Rafale—an air­plane it is sim­i­lar to in many re­spects. While ac­tual trig­ger may have been the MMRCA loss, the com­ing to­gether of the two mas­sive firms has also been driven by a per­ceived need to mount a sin­gle cor­po­rate en­tity to bat­tle US firm Boe­ing. Syn­er­gies would also al­low both firms to ra­tio­nalise op­er­a­tions in the face of a global dip in de­fence ex­pen­di­ture. In­dia, as it turns out, is an ex­cep­tion, not re­ally a rule in that sense.

One of the the­o­ries that in­sid­ers in both EADS and BAE had for the MMRCA loss was that it wasn’t led by the British team, which had decades of ex­pe­ri­ence do­ing aero­space busi­ness with In­dia. The much more in­ex­pe­ri­enced Ger­man com­po­nent of the con­sor­tium, some in both com­pa­nies say, may not have pre­cisely know how to han­dle the pro­gramme. This was only one ex­am­ple of dis­parate cor­po­rate en­ti­ties per­haps not tak­ing the best de­ci­sion avail­able – some­thing that may be stream­lined with a merger. The com­plex­ity of both com­pa­nies, though, would still need a phe­nom­e­nal de­gree of syn­ergy, con­sid­er­ing that EADS and BAE have over­lap­ping in­ter­ests and busi­ness units. For in­stance, both com­pa­nies man­u­fac­ture trainer air­craft, UAVs and other ad­vanced sys­tems for the civil sphere. The merged en­tity would, how­ever, be per­haps the most in­te­grated weapons com­pany in the world —mak­ing ev­ery­thing from war­ships, to air­craft, UAVs, he­li­copters and space­craft, to land sys­tems, elec­tron­ics, mil­i­tary ve­hi­cles, mis­siles and ar­tillery. In­dia has pro­cure­ment or joint de­vel­op­ment in­ter­ests in vir­tu­ally ev­ery one of those ar­eas.

Both EADS and BAE Sys­tems have had a fairly mixed bag in the coun­try, even if an­a­lysts find it tempt­ing to paint most things now with the MMRCA brush. BAE Sys­tems has a suc­cess­ful Hawk pro­gramme cur­rently on with HAL—it has just been handed an RFP for 20 more Hawks for the IAF’s re­vamped aerobatics team—and is in line to re­ceive close to a bil­lion dol­lar deal for 145 M777 ul­tra­light ar­tillery guns. Sev­eral other com­pe­ti­tions, both in de­fence and civil, shore up a healthy mar­ket out­look for a com­pany that has, across sev­eral avatars, been an old hand in deal­ing with In­dia. EADS, on the other hand, has faced a string of dis­ap­point­ments in In­dia, cer­tainly as far as de­fence is con­cerned. While the Ty­phoon de­feat stung badly, it was also made to en­dure two big-ticket con­tract aborts at the last mo­ment—the first at­tempt to pro­cure 197 light re­con­nais­sance he­li­copters and the first at­tempt to pro­cure six new mid-air re­fu­elling tankers. The com­pany waits eagerly for the out­come of the sopho­more at­tempt on both con­tracts.

A cor­po­rate com­ing to­gether of the two com­pa­nies would make the re­sult­ing en­tity a for­mi­da­ble one, even if one is to con­sider how wrong merg­ers in the arms in­dus­try can ac­tu­ally go. In In­dia, an EADS-BAE en­tity would be in a po­si­tion to be a pan-in­dus­try ven­dor. And con­sid­er­ing that In­dia hap­pens to be one of the few coun­tries that doesn’t ap­pear to be in a po­si­tion to slash its se­cu­rity spend­ing, New Delhi could take pri­macy of place in the at­ten­tion that the new com­pany pays to in­ter­na­tional cus­tomers.

—SP’s Spe­cial Cor­re­spon­dent

M777 ul­tra­light

ar­tillery gun

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