More A&D mergers may fly as firms compete for defence budgets

Posted on 13 Sep 2012

Boeing’s chief executive has said he expects more consolidation in the aerospace and defence industry following confirmation of merger talks between BAE Systems and EADS.

BAE Systems confirmed yesterday that it is in talks to merge with European aerospace group EADS.

The merger, the largest in this industry for over 10-years following the formation of EADS in 2000, could spark more consolidation as big and mid-cap companies vie for dwindling defence budgets.

Jim McNerney, CEO of Boeing, told the Reuters news agency yesterday that his company was not threatened by the merger. He added the deal could mark the start of more consolidation in the industry.

“I don’t see this as something that is going to threaten us fundamentally,” McNerney told Reuters after a speech to the Council on Foreign Relations in Washington.

Several commentators have said the merger makes sense in this environment, where defence spending worldwide is waning while civil aerospace is booming. Airbus had an order book of over 4,300 aircraft in May, and has secured more orders since, most recently a £4.5bn order for over 50 aircraft for Philippines Airlines.

Chief executive of BAE Systems in the US, Linda Hudson, said the deal made sense given the slowdown in US and European defence spending.

BAE Systems’ share price has been rising strongly for the last month, against the pattern for the general engineering sector, fueling speculation of a merger.

Some inside the defence industry have voiced concern that a merger of this size – which will create a group with revenues over £58bn – will inevitably mean job losses as the merged entity realises efficiencies.

Unite national officer, Ian Waddell said: “Today’s news has come totally out of the blue for the workforce. The new company would be the largest manufacturing company in the UK, employing tens of thousands of people in defence manufacturing and at Airbus.  It is vital that the government ensures these jobs are protected in the UK before approving the merger.”

But the sense among top executives now is that there will be plenty of work to do in civil aerospace and ancillary sectors that include space, avionics and logistics.