BAE-EADS merger could face US regulatory hurdles

Washington DC
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A merger with BAE Systems could dramatically expand the EADS presence in the North American defence market, but at the same force divestitures of business units with sensitive US-made technologies.

BAE has benefited more than any foreign company from the UK government's "special relationship" with the White House.

Those ties allowed the company to acquire Sanders from Lockheed Martin in 2000, a company with electronic warfare technologies so sensitive they were made off-limits to BAE's European competitors. BAE also was cleared to acquire United Defense, a major land and naval armaments company in 2005.

Both acquisitions offered BAE the opportunity to grow quickly in the US defence market during a decade when military spending soared. Meanwhile, BAE's foreign competitors were forced to grow slowly through smaller acquisitions and by moving existing production to US soil.

A notable exception was Finmeccanica's acquisition of DRS Technologies in 2008. At the time, Italy's government, led by Silvio Berlusconi, supported US policy in Iraq and Afghanistan. EADS North America also expressed interested in DRS Technologies, but it was never clear if the deal would have been cleared by the Committee on Foreign Investment in the US (CFIUS).

A CFIUS review of the proposed EADS-BAE merger would be likely to focus on the disposal of BAE's Sanders unit, a leading maker of electronic warfare tools and weapons for the US military and its allies. It supplies, for example, the ALR-94 electronic warfare system for the Lockheed Martin F-22 and the Barracuda electronic warfare system for the F-35.

But Teal Group aerospace analyst Richard Aboulafia says a divestment of the entire US arm of BAE Systems is not out of the question.

He says: "There are many benefits and many avoided negatives to separating the US business. From the US standpoint that includes not being affiliated with a European prime."

At the same time, any US assets that would be retained under a merged BAE-EADS company could still be highly valuable. Although US defence spending is predicted to contract by $500 billion over the next decade - an amount that could be doubled if the US Budget Control Act is not amended or repealed by January - the Department of Defense still remains the world's largest weapons buyer by a significant margin.

Among the programmes that would gain involvement from EADS if the merger proceeds is the F-35. "It's either a huge opportunity or a huge challenge, depending on your viewpoint," adds Aboulafia.

The combined business would also be more of a competitive threat to Boeing on its home turf, he notes "from both its critical mass and its [US] industrial footprint".