After a series of expensive acquisitions during the Bush-era buildup, BAE is left with little cash and no capacity to borrow even as the prospect of a shrinking defense pie has depressed its stock price. In short, it needs to be able to call on a stronger balance sheet if it wants to participate in the consolidation and make the leap to the top tier of military contractors.
By contrast, EADS, the parent of Airbus, is rolling in cash thanks to a boom in sales of its new line of fuel-efficient commercial jets. But EADS would like to have what Boeing has — a vibrant defense business that can keep it healthy during the inevitable downturns in the commercial airline cycle. Unfortunately, its defense business has never been able to break out of the largely captive European market and make inroads in the much larger U.S. defense market. Because of the high regard BAE is held in by the government and other prime contractors, it offers Airbus its best hope of breaking into the U.S. market with its fighter jets, missiles, rockets, satellites and helicopters, and competing head-to-head with the U.S. defense giants.
The deal as envisioned by BAE and EADS is mind-numbingly complex — legally, financially, but most of all politically. The governments of France and Germany, along with their corporate proxies Daimler and Lagardere, are being asked to reduce their equity shares and give up most of their operational control. Each company will continue to have separate directors, with separate share listings in London for BAE and Europe for Airbus. In order to satisfy U.S. security concerns, BAE’s U.S. operation — as it is now — will be a third entity, entirely owned by BAE but with yet another board of directors and elaborate rules to prevent the transfer of sensitive technology.
For the U.S. government, the key decision of whether to allow the merger will fall to a little-known committee made up of the secretaries of eight Cabinet departments and supervised by a staff at the Treasury. The CFIUS process is so secretive that the committee and its members are not even supposed to acknowledge that a matter is under review and are barred from communicating with anyone other than the companies applying for approval. But for controversial cases — as when the investment arm of the government of Dubai tried to take over management of several U.S. ports, or when a Chinese-owned company bid for Unocal — these deals can turn into orgies of special-interest pleading and political grandstanding in the news media and on Capitol Hill, all of which can’t help but affect the thinking of Cabinet members or the president, who by law make the ultimate decision.
My own opinion is that while there are legitimate security concerns from Airbus’s takeover of BAE, they can be handled by strengthening the current special security arrangement that governs BAE in its classified programs.
And although I generally root for the home teams, as taxpayers we should welcome the arrival of a strong new competitor to the market at a time when the defense industrial base is shrinking. In return, however, the United States should be able to wrest new assurances from European allies that they will stop favoring their own firms in the awarding of military contracts.
You can bet a plane ticket to Seattle that Boeing will complain that profits and technology from BAE’s defense work will be used to give Airbus an unfair advantage in the commercial airplane competition, thereby costing American workers their jobs. To that, one only need reply that turnaround is fair play. Americans can’t insist that European countries stop favoring their national champions if, whenever it really matters, we continue to treat Boeing as if it is ours.
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