BAE Systems pursues its Atlantic devotion

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BAE Systems likes to describe itself as the “premier transatlantic defence company”. In truth, it is the only real contender for the title.

Britain’s biggest arms manufacturer, its way smoothed by the special relationship between the US and UK, has embarked on an acquisition spree over the past six years that has seen it emerge as the Pentagon’s seventh-largest contractor.

Rivals have looked on jealously as BAE has claimed a growing share of a yearly US defence budget that exceeds $400bn.

Despite the likelihood of a much lower-than-expected sale price for its 20 per cent stake in Airbus, the passenger jet maker, BAE remains willing to spend heavily to break into the top five US defence suppliers.

“We can grow by bolt-on acquisitions,” says Mark Ronald, head of BAE’s $11bn-a-year US business. “We look at things over $1bn – and I guess $10bn, maybe even $20bn, at some point wouldn’t be completely out of the question.”

BAE decided to cash in on Airbus to invest in its core defence business, primarily in the US.

Sales at BAE Systems Inc, the US subsidiary, have grown 250 per cent in five years. It has made more than a dozen acquisitions since 2000, capped by last year’s $4.2bn purchase of United Defense Industries, or UDI, maker of the US army’s Bradley fighting vehicles.

Mr Ronald has been a prime architect of that expansion, respected by the Pentagon and industry peers. He turns 65 soon and, though in good health is often rumoured to be considering retirement. Under US law, he is under no obligation to step down.

“In the past he has been key to BAE’s US ambitions,” says a senior industry adviser. “But I think institutionally BAE is able now to stand on its own two feet. The UDI deal has given them presence.”

BAE, still known by many in the UK as British Aerospace, employs 45,000 of its 100,000 workers at BAE Systems Inc.

The BAE business done in the US has led its board to ponder a New York listing and a possible shift of headquarters across the Atlantic.

Such a move would be opposed by some in the UK government because of fears about a US company being the dominant supplier of UK weapons.

But BAE is already 50 per cent owned by US investors and Mr Ronald believes nationalistic worries about head office location are overblown. “I just don’t think it matters. There are some companies where nobody knows where the hell their headquarters are.”

While BAE executives are eager to pursue US deals, the problem is identifying targets that will boost earnings but are not prohibitively expensive. For now, acquisitions are likely to be below $2bn, but the company remains alert to bigger opportunities. “There are in order of 20 possible targets out there, but they are not for sale,” says Mr Ronald.

BAE has been linked in the past with General Dynamics. It has a good working relationship with Raytheon, the missiles group, and some analysts speculate that a tie-up could make sense once Raytheon has divested its corporate jet business.

A large deal would raise antitrust issues. But Mr Ronald believes the US government would be supportive.

“My own view, obviously not shared by everybody, is that there probably is not a limit to what we could buy,” says Mr Ronald. “We are already working on some of the biggest and most sensitive stuff the US does.”

BAE is interested in expanding its US defence electronics business, where sales are about $5bn yearly. After its creation in 1999 from the merger of British Aerospace and Marconi Electronic Systems, BAE’s first big US acquisition was the 2000 purchase of Sanders, a contractor on electronics work for the Pentagon.

BAE has looked before at L-3 Communications, the acquisitive New York-based defence electronics company. Elsewhere, US engineering and aerospace groups such as ITT and Rockwell Collins own defence electronics businesses that would dovetail.

The US defence budget is likely to come under pressure in the next few years, and large new weapons programmes such as the $276bn Joint Strike Fighter are obvious cost-cutting targets.

As a result, most defence dollars will be spent on maintaining and upgrading existing fighter jets, warships and armoured vehicles.

BAE has been a laggard in targeting this lucrative “after-market”, which will be hotly contested by all the big US arms manufacturers.

“We have 12 years experience of this going back to the Marconi days but we are looking to bring it together in a more unified way,” says Mr Ronald. It is going to be tougher but I think we have the right keys.”

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