BAE Systems needs its proposed merger with Airbus parent EADS to succeed if it is to avoid being cast adrift as a company without a clear strategy in a shrinking industry or a takeover target for predatory U.S. rivals.

If the planned $45 billion merger between the British defence group and the European aerospace giant does not go ahead, BAE could look to do a deal with a U.S. group, sell off its standalone U.S. business or remain alone trying to squeeze growth from the contracting global defence sector.

Europe’s biggest defence deal in a decade faces many hurdles, including a row over the proposed 60/40 EADS-BAE ratio, how to ringfence top-secret projects and how to satisfy governments keen to safeguard EADS operations in France and Germany.

“BAE see their defence earnings going down, what do they do about it? They either get into bed with someone going up like EADS or they team up with someone who can help them rip a load of costs out and get economies of scale like a Rockwell Collins , a General Dynamics or a Lockheed Martin ,” said an equities manager at a British investment house holding a stake in BAE.

“The conspiracy theorists say BAE are hoping to flush out a bid from one of the U.S. prime contractors.”

Such plans could, however, be scuppered because of the U.S. government’s reluctance to see more consolidation among their prime contractors and competition reduced. Some analysts believe this attitude could change given that BAE is one of the biggest foreign suppliers of weapons to the Pentagon.

“BAE’s strategy has taken it deep into UK and U.S. defence but both of those markets are in deep trouble over the medium-term but at the moment doing nothing is not really an option for BAE,” said Societe Generale defence analyst Zafar Khan.

If the merger falls foul of the many political and regulatory obstacles in its way, BAE will be left stranded and Ian King, its chief executive of four years, will face tough questions about his vision for the company, both past and present.

“BAE doesn’t have a ‘Plan B’ as such, it’s the deal with EADS or back to trying to drive growth from defence and cyber, which is pretty limited,” said a source close to the British contractor.