Arab Today, arab today bae and eads hold steady year after failed merger
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Arab Today, arab today
Arab Today, arab today

BAE and EADS hold steady year after failed merger

Arab Today, arab today

Arab Today, arab today BAE and EADS hold steady year after failed merger

Paris - AFP

A year on from the failed merger of British defence firm BAE Systems and French aerospace company EADS, shareholders are unlikely to have noticed a difference but the companies' fortunes may yet diverge, analysts believe. Talks between the two companies had aimed at combining BAE's drive for profits and globe-reaching customer base with the commercial might of EADS' successful Airbus to create an industry leader. But after objections from government stakeholders, notably Germany, the tie-up was abandoned in October 2012. Since then, the fortunes of both firms have been largely positive even though an announcement of cutbacks last week at BAE could give the impression things were looking sour. The Britain-based giant announced it will axe 1,775 jobs and close the historic Portsmouth shipbuilding yard in Britain. But Philippe Plouvier of Roland Berger strategy consultants said the Portsmouth closure only reflected hard business logic on the part of BAE, designed to preserve shareholders' interests. "BAE's strategy has always been to tell the British government: 'If you don't place an order, I shut down the production sites'," he said. "When the government ordered armoured land vehicles from General Dynamics in the US, BAE immediately closed down all its land defence sites in Britain," he recalled. BAE's continued survival without being gobbled up by a rival is remarkable given the alarming predictions being made at the time. "After the collapse of the merger with EADS everybody was of the opinion that BAE was in dire straits," said Tom Chruszcz, an analyst with Fitch Ratings. It was "just a question of time before somebody would buy them out," he added, but "one year on, nothing has happened." However, Chruszcz believes that BAE may yet be in danger because it is "heavily exposed to the defence sector, particularly in the US", which accounted for 40 percent of their revenue at the end of 2012. At a time of government cutbacks, especially in defence as operations in Iraq and Afghanistan wind up, "that revenue basis is shrinking and becoming ever more challenging," he said. Meanwhile, EADS has rebounded in a spectacular fashion following two key decisions by Tom Enders, the company's chief executive. Enders has persuaded France, Spain and Germany to remove themselves from the day-to-day running of the company, and intends to restructure EADS to merge its space, defence and military aircraft divisions to mitigate exposure to government budget cuts. EADS has abandoned a previous goal of balancing civilian and military revenue, but says the new division, to be named Airbus Defense and Space, will still be the tenth-largest defence company in the world. Its share price has almost doubled in a year and reached a historic high of 50 euros on the Paris market this month. Enders wants to increase the group's competitiveness to take its operating profit margin to 10 percent, the figure currently enjoyed by none other than BAE. "BAE's ambition is to maintain its margin, and preserve its capacity to generate cash flow so that it can go on distributing dividends," said Christophe Menard, analyst with Kepler Chevreux. But Guy Anderson, a senior analyst at IHS Jane's, said reducing costs alone was not sustainable for BAE. "Is dividend distribution on the back of cost cuts a sustainable long-term strategy? Not alone, no. "We'd expect BAE to continue its push into emerging markets to offset some declines in the West, and to build on its position in adjacent markets like cyber-security." That won't be enough to offset the budget cut-backs seen in recent years in the United Kingdom and the United States, Anderson conceded. But he doesn't think that the decline is irreversible, given the cyclical nature of defence markets. "The boom years of the 2000s certainly weren't foreseen during the defence spending drought of the 1990s. Strategic realities change," he said.

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