This weekend's financial Times has an
excellent article that highlights the delicacy of alliances, mergers,
and their affects on nations.
The article “Cameron under domestic pressure to block
The French and German company, European
Aeronautic Defense and Space (EADS) is the major supplier for both
nation's military hardware like the Typhoon fighter jet, and also
Airbus – commercial transportation aircraft which has production
orders of approximately C486BN.
BAE is the UK's top defense contractor
producing the nations deep technologies including cryptology and
communication systems, and major construction including traditional
and strategic nuclear submarines, and Hawk fighter aircraft. BAE is
also a major supplier for the US Department of Defense.
Strengths of the merger:
The merger talks are rooted in long
standing cooperative efforts by both companies and their nations on
projects including the Concord supersonic commercial airliner
(Wikipedia 2012), fighters jets, commercial airliners and commercial
transport aircraft.
Weaknesses of the merger:
As two independent companies and the
governments that depend on them for defense projects, the
relationship is para-mutual, but as the companies have moved towards
a merger, concerns are growing in the UK Prime Minister's office of
the nations ability to manage it's own defense. This position is
exacerbated by the German and French direct ownership and influence
on the companies management. The French and German governments are
pushing for 9 to 13 percent ownership in the merger. The UK has no
direct government ownership in BAE and is concerned that foreign
government ownership may leverage BAE, causing the company to be less
or unresponsive to future UK defense policy needs without the partner
nation's approval. “It might be stealth aircraft, avionics, cyber
capability. If you don’t have access to a defense champion that
provides it, national security is undermined.” (Pickard, j.,
Parker, A., Sakhoui, A. 2012).
The Opportunities:
Both companies see the EADS-BAE merger
as an additional advantage in competition against the US commercial
aircraft manufacturer, Boeing. Current economic drivers for also BAE
include attaching to the Airbus production contracts. EADS sees the
merger as an avenue towards US defense contracts (Pickard, j.,
Parker, A., Sakhoui, A. 2012).
The Threats:
In response to the merger and foreign
government influence on defense products, Boeing the US commercial
and military aircraft manufacturer, is working a US lobby effort in
congress to remove BAE from “privileged status”. Stripping the
status would essentially freeze US BAE defense contracts. (Gribben,
R. 2012) The threat of losing US defense contracts and German-French
direct stake in the merged companies ownership have stalled the UK
government from moving forward in allowing the deal (Pickard, j.,
Parker, A., Sakhoui, A. 2012).
Overall, this article highlights the
delicate balance of mergers in national defense companies. The
companies themselves are drawn towards the merger, but the
governments that depend on those companies for defense products need
to overcome the critical issue of direct state ownership and leverage
over the merged companies policies. The “Semi-strong form trust and
competitive
advantage” describes the companies
long standing partnerships and interest in a merger. “The firm that
can rely on social governance to generate semi-strong form trust will
have a cost based competitive advantage over the firm that must rely
on economic governance to generate semi-strong form trust.” Namely
Boeing is working the governance position in order to block a
perceived economic and competitive advantage that a state sponsored
company like the merged BAE-EADS would have verses a publicly held
defense company like itself or other defense contractors. (Barney,
J.B. & Hansen, M.H. 1994).
References:
BAE (2012) Retrieved from
http://www.baesystems.com
Barney, J.B. & Hansen, M.H. (1994).
"Trustworthiness as a Source of Competitive Advantage."
Strategic Management Journal. Vol. 15, pp. 175-190. Available
at http://www.jstor.org/stable/2486817
EADS (2012)
http://www.eads.com/eads/int/en.html
Gribben, R. (7 October 2012) David Cameron on standby to save 28bn BAE-EADS merger. The Telegraph [online]. Retreived from http://www.telegraph.co.uk/finance/newsbysector/industry/defence/9592856/David-Cameron-on-standby-to-save-28bn-BAE-EADS-merger.html
Gulati, R. (1998) "Alliances and
Networks" Strategic Management Journal, Vol. 19, pp.
293-317
Pikard, j., Parker, A., Sakhoui, A. (6 October 2012). Financial Times - FT Weekend. pp.1&5
Wikipedia (2012) Concord. Retrieved
from http://en.wikipedia.org/wiki/Concorde
Interesting example! It's great that you conducted a SWOT analysis. If the merger does take place, what do you think will be the biggest barriers to success? Do you think any challenges could arise from cultural differences?
ReplyDeleteHi Jack,
ReplyDeleteYour post are educational and insightful. You did a wonderful job with your SWOT analysis. Given the many challenges it faces do you see the merger consummating? What do you think the governments would need to do to overcome the critical issue of direct state ownership and leverage and approve the merger?
LeiLani
Thanks for the response. Personally, I see Boeing and McDonald Douglas really pushing to strip BAE from US DOD purchases over this merger. Boeing annual revenues are at about 70 billion. The merged companies would equal 90+ billion. If I were arguing for the US aeronautical lobby, is that the 10 billion in annual revenue that BAE receives would help to equalize the competition.
ReplyDeleteThe British government does seem interested in joining the two companies, but realize that the foreign government interest in the companies threatens their ability to manage their own defense projects and threatens US trade with the Department of Defense. I’m have no doubt that the agreement will have UK only exclusion to the merger and that the foreign government ownership will have limitations on what products are available to the different countries and that the UK government will have an equal say in the company’s plans and operations.