BAE Systems moves to stress integrator role

 - June 13, 2007, 12:12 PM

Does the recent sale of its Inertial Products business signal a round of sell-offs by BAE Systems? A statement accompanying the move noted that the company’s strategy is to expand as a developer and integrator of systems and “de-emphasize its role as a components provider.” 

BAE owns many other subsystems, ranging from antennas to millimeter-wave radars to thermal weapons sights. According to one company insider, more of them could soon be on the auction block “unless we can vertically integrate them.”

However, a spokesman for BAE’s Electronics and Integrated Solutions (E&IS) group noted that the inertial products were “the nearest thing to a piece-parts business” in the company’s portfolio. The group employs 810 people at three U.S. sites and one in the UK, supplying navigation and guidance sensors for aircraft, weapons, and fighting vehicles. The product line includes the TERPROM terrain-profiling sensor and a miniature silicon gyro, both from the UK site at Plymouth. Private equity firm J.F. Lehman & Co. purchased the business for $140 million.

E&IS is one of two transatlantic business groups in BAE Systems created from the company’s steady expansion-by-acquisition, especially in the U.S. E&IS designs, develops, produces and supports electronic systems and subsystems for a broad range of military and commercial uses. The group inherited most of the former Lear Siegler, Marconi and Tracor businesses, and has its headquarters in Nashua, New Hampshire, home to the electronic warfare business once known as Sanders.

With the latest $4.5 billion acquisition of Armor Systems, 42 percent of BAE’s sales will come from the U.S., up from 36 percent last year. Armor Systems is a Florida-based manufacturer of tactical wheeled vehicles and their armor. It will be added to BAE’s Land and Armaments business group, the other transatlantic entity, and one that has grown rapidly thanks to BAE’s purchase of Alvis in the UK and United Defense in the U.S.

A third business group, Customer Solutions (CS), consists almost entirely of U.S.-based activities focusing on information technology (C4I systems, missile defense and the like) but also including ship repair. In total, BAE employs more than 40,000 people in the U.S., with nearly 8,000 more to come from Armor Systems.

Confusingly, the CS group is separate from Customer Solutions & Support (CS&S), which was a UK-based group within BAE that majored in the business of providing through-life support solutions for military aircraft. CS&S also managed BAE’s large businesses in Australia and Saudi Arabia.

In still another corporate reorganization, on last January 1, the support activities were regrouped with BAE’s military aircraft business in a new entity named Military Air Solutions. Three of BAE’s UK-based businesses were also rebranded, as Surface Fleet Solutions (for example, the Type 45 destroyer, Landing Ship Docks and the like); Submarine Solutions (the Astute program); and Underwater Systems (torpedoes). BAE’s other UK entity is Insyte, a systems and radar business created in 2005 when Alenia Marconi Systems was broken up.

Australia and Saudi Arabia now fall within a new International Business sector that includes BAE’s activities in South Africa and Sweden. This sector also books BAE’s return from its shareholdings in MBDA (37.5 percent) and Saab (20 percent). BAE also retains a 25-percent stake in Selex, the company created by Finmeccanica after it bought most of BAE’s radar and avionics activities in the UK in 2005. However, that stake is expected to be sold to Finmeccanica soon. BAE has a $268 million put option that is exercisable within the next three months.

Since the reorganization, Ian King has been the chief operating officer running the five UK-based businesses plus International. Walt Havenstein is the other COO, heading up the three U.S.-based businesses. Both report to Mike Turner, managing director, and Dick Olver, chairman.

Last year, BAE also sold its 20-percent stake in Airbus to EADS; its aerostructures business in the UK to Spirit Aerospace; and the Atlas Electronik business in South Africa.   

Bribery Questions Won’t Go Away

Last December, the British government halted an inquiry by the Serious Fraud Office (SFO) into BAE’s two massive Al Yamamah contracts with Saudi Arabia. The oil-for-arms deals struck in 1986 and 1988 have long been tainted by allegations of bribery. Since 2004, the SFO had been investigating allegations of commission payments and the existence of a slush fund to entertain members of the Saudi royal family.

The inquiry reportedly led to secret Saudi bank accounts in Switzerland and mysterious BAE subsidiaries in offshore jurisdictions. Then, Saudi Arabia reportedly threatened to cancel plans to buy 72 Eurofighters and suspend intelligence-sharing with the UK. In calling off the hounds, the UK attorney-general cited “the need to safeguard national security.” He added that the SFO had not yet gathered enough evidence to warrant any prosecutions and that the further 18 months of inquiry envisioned by the SFO would damage the public interest.

But the controversy has continued unabated. In March of this year, a working group of the Organisation for Economic Co-Operation and Development on Corruption in International Business Transactions, voiced serious concerns about halting the SFO inquiry and it decided to examine further the UK’s efforts to fight bribery. In April, it emerged that the U.S.

government had also complained to Britain about ending the inquiry. An all-party committee of British legislators concluded that it “may have caused severe damage to the reputation of the UK.”

Last month, British newspapers claimed that the Saudi government was embarrassed by the continuing focus on the Al Yamamah contracts. The Times of London reported that Riyadh had halted negotiations with BAE to supply Hawk advanced jet trainers and Type 45 destroyers. However, a deal for the 72 Eurofighters, referred to as “Al-Salam,” would still be signed in July, along with another contract to upgrade the Saudi fleet of Tornado GR.1 strike aircraft. The Times also claimed that the U.S. Department of Justice was considering the launch of its own inquiry into alleged corrupt practices at BAE Systems. BAE now derives more than 40 percent of its sales from the U.S.  

Moreover, according to a British opposition spokesman, the SFO is still investigating six other cases involving BAE Systems. Liberal Democrat MP Dr. Vincent Cable told Parliament on May 1 that inquiries continue into the sale of Hawks to South Africa, frigates to Romania and to Chile, air traffic control equipment to Tanzania, unspecified equipment to Qatar and Gripen fighters to the Czech Republic. BAE has a 50-50 joint venture with Saab to sell the Gripen; the Swedish government is also investigating the Czech sale.

In mid-May, prosecutors from five European countries including the UK, Sweden, Switzerland, Austria and the Czech Republic met to coordinate their inquiries into the marketing of the Gripen fighter to the latter two countries. Separately, the Swiss government confirmed that it had opened a criminal investigation into possible money-laundering allegedly involving BAE Systems.

BAE has denied any wrongdoing. We should point out that new British legislation that extended the law of corruption to the bribery of overseas officials didn’t pass until 2001.