Recent headlines concern the potential merger between London listed defense contractor BAE Systems and the Franco-German defense combine EADS. What does this mean for the political and defense consumer - not to mention investors ?
For the mainland European politician a combination offers the prospect of a European champion in the defense sector. The arguments about efficiencies and ultimately cost-savings to national governments of common procurement are likely some way away - if indeed ever. Obtaining synergies outside of combining back-office functions such as accounting, HR etc. would involve closing production lines which has a geographic and political complication. The decision to continue separate management post merger implies inefficiency from a business and investment standpoint.
BAE Systems however has an interesting strategic culture. In the 1990s it hankered desperately for an American suitor and was ultimately dashed by MacDonnell Douglas's acquisition by Boeing. Acquiring United Defense from the Carlyle Group gained exposure to land systems in the united States which has served the business well and established a toehold in the mindset of the Pentagon. Lets also not forget the BAE sale of its Airbus stake in recent years - not exactly the strategic move of a business keen to enmesh itself with European partners…
How willing is BAE really to put at stake its access to the US in return for 'becoming part' of Europe ?
Perhaps the reality is that this courtship of EADS is a smoke screen for a BAE push for a transatlantic partner. Given the USA will remain the worlds largest defense spender at the highest levels of technology is going to make the C-suites at Lockheed Martin, Boeing, General Dynamics and Northrop Grumman think seriously about cementing a tie-up before Europe becoming a more closed market.
The synergies of English language, military interchange between the principal nations and overseas exports markets such as Saudi Arabia offers a more compelling logic for a tie-up between a North American and British defense contractor surely ?
Looking more broadly the completion of this combine could ultimately reflect the defense industrial drift between the USA and Europe - with Europe reluctant to invest in research and development and the USA having pushed a high level of sustained defense spending.