“By considering this deal, has BAE admitted that focussing on U.S. defence and cyber security was flawed and won’t deliver real growth in the medium term? It looks like it,” said a fund manager holding BAE stock, who wished to remain anonymous.
If the deal with EADS goes through, BAE’s past forays into the automotive, construction and support services sectors in search of growth and reduced reliance on the defence sector will become a distant memory.
Since its privatisation in the 1980s, British Aerospace, as BAE was then, has bought and sold mass market UK carmaker Rover, Dutch construction firm Ballast Nedam, German naval systems business Atlas Elektronik and its own aerostructures arm.
BAE is still chopping and changing today. It has hired consultancy firm LEK to review options for its British shipbuilding business including the possible closure or sale of one of its three shipyards in Scotland and southern England.
The British government holds a ‘golden share’ in BAE, granting it the right to block any deal, although Prime Minister David Cameron has made positive noises about the merger. If a U.S. suitor made a play for BAE Cameron would be unlikely to block a deal because such a deal would only strengthen Britain’s ‘special relationship’ with the United States.
In a column in Britain’s Daily Telegraph newspaper senior Conservative MP Bernard Jenkin urged the British government to “use its golden share to force the break-up of BAE, to ensure that key assets are owned by UK companies, and to create a more fragmented, entrepreneurial and creative set of businesses, to serve our interests and to export to the world.”
Espirito Santo analyst Ed Stacey believes it would be difficult for King, who has a strained relationship with many of BAE’s top shareholders, to remain as CEO if the EADS deal fails.
“It would be tough for King to go out on a roadshow saying he is completely committed to his strategy and is happy with his portfolio if the EADS deal doesn’t happen,” he said.
BAE’s shares are at 321.30 pence, back below their price when news of the deal was leaked. They initially jumped but fell back on concern about political and regulatory barriers.
The main hurdle for King, though, is just getting the deal done one way or another.