BAE Systems focuses back on Middle East after failed Merger
BAE Systems is rushing to wrap up negotiations with customers in the Middle East as Europe’s largest defense company seeks to regain its footing following a failed merger with European Aeronautic, Defence & Space Co. (EAD)
The British weapons maker is in advanced talks with Oman to negotiate a deal that BAE said last month it wants to complete by year-end. Among the sticking points are Omani demands for in-service support.
Middle East sales are critical to BAE as defense spending in its two largest markets, the U.S. and U.K., drops. Besides Oman, BAE is working to win a follow-on Typhoon contract in Saudi Arabia as well as build up a stronger strategic relationship in the United Arab Emirates for sales of drones. The region accounts for about 13 percent of BAE’s revenue.
In the aftermath of the botched EADS merger, BAE pledged to conclude the Omani contract before 2013. Talks slowed earlier this year because Oman was dissatisfied with progress on a delayed naval vessel contract.
“The failure to close the deal with EADS was a setback, so a deal on Typhoon would be a fillip to moral,” said Douglas Barrie, aerospace analyst at the International Institute for Strategic Studies. It would also give a lift to the Eurofighter, built in conjunction with EADS and Italy’s Finmeccanica SpA (FNC), after losses in several competitions, he said.
What went wrong with EAD merge
Sources say, Merger talks between defense industry giants BAE Systems and EADS may have collapsed. But the disturbing realities of the global arms trade mean it would always have been a difficult deal to close. A large part of the reason for this is the extremely close and complex relationships weapons manufacturers, perhaps more than in any other sector, have with their governments and intelligence agencies. This is a consequence of their role in foreign policy, national security and their ability to collect intelligence wherever they operate. They often have close links to political parties too, especially in Germany, as a result of their generous donations. These roles afford them proximity to those at the apex of power. Relationships are reinforced by the revolving door for personnel between corporations and government.
As a result, defense companies are insulated from the cold winds of market competition. We can see this not only in the extent of subsidies doled out to the industry globally, but also in the fact that most arms companies fail miserably when attempting to operate outside the confines of multibillion-pound state contracts with guaranteed profits. And in an industry that accounts for about 40% of all corruption in world trade, defense companies are often protected from the full legal consequences of their sometimes nefarious actions by their home governments.
BAE was spared the massive legal fallout from paying about £6bn in "commissions" on the al-Yamamah deal with Saudi Arabia by the direct personal intervention of Tony Blair in the dying days of his premiership. The company was then fined a derisory £500,000 for "accounting irregularities" on one transaction, in return for which the Serious Fraud Office dropped advanced investigations into corruption in five highly controversial arms deals. read more