BAE Systems

BAE Systems, plc is the world's fourth largest defense contractor [2] and a commercial aerospace products manufacturer. Based in the United Kingdom (UK) the company has extensive worldwide interests, particularly North America.

History

Formation

It was formed on November 30, 1999 with the merger of British Aerospace (BAe) and Marconi Electronic Systems (MES), the defence arm of The General Electric Company (GEC). The merger had been agreed on April 27, 1999.

It was widely anticipated that BAe would merge with Germany’s DASA to form a pan-European aerospace giant, however BAe chose instead to merge with GEC’s defence electronics business. This move, to create what could be described as a UK company compared to what would have been an Anglo-German firm, made the possibility of penetration of the United States (US) defence market more likely.

Following that decision, DASA instead merged with Aerospatiale to create the European Aeronautic Defence and Space Company (EADS). This group was joined by Spain’s CASA following an agreement in December 1999.

Since the creation of BAE Systems the company has steadily increased its investment in, and its revenues from, the US, while continental European companies have made limited moves into that massive market. Major European companies such as Thales and EADS are unlikely to ever be awarded, for example, a position relative to BAE Systems' involvement in the F-35 Joint Strike Fighter programme.

BAE Systems inherited the "special" shareholding that was established when British Aerospace was privatised. This special share, with a nominal value of £1, is held on behalf of the Secretary of State for Trade and Industry. This shareholding prevents amendments of certain parts of the Articles of Association without the Secretary of State's permission. These Articles include the following requirements:

• No foreign person, or persons acting together, may hold more than 15% of the company's shares.
• The majority of the board must be British citizens.
• The CEO and Chairman must be British.

Merger undertakings

Various conditions were attached to approval of the merger between BAe and MES.

1. The MES shipyards and Marconi Avionics were to be kept as subsidiaries of the new company, with independent financial accounts. Further these subsidiaries must be available to all potential prime contractors (i.e. including external companies) on equal terms.
2. BAE Systems must competitively tender sub-contracts, i.e. the new subsidiaries must not automatically receive sub-contracts.
3. Due to the competition of BAe and MES in various major defence projects, the company was ordered to set up various "firewalls" to prevent interaction between the former MES and BAe teams on those projects. An example of this was the initial stages of the Joint Strike Fighter programme where MES was involved in Boeing's X-32 project and BAe supported Lockheed Martin's X-35 bid. Other relevant projects were; the Future Scout & Cavalry System (FSCS)/TRACER Program (“FSCS/TRACER Program”), Skynet 5, Astute class Training Programme and MES shipbuilding projects.
4. A compliance officer was appointed by BAE Systems to ensure the new company followed these requirements and procedures. The remit of this job was strictly set out, including the qualifications (length of time with the company etc), access to staff and information, and independence.

Expansion & further consolidation

With almost total consolidation of the defence industry on the European continent, BAE Systems turned its attention to North America, for example acquiring Lockheed Martin Control Systems, (LMCS) which produces controls for the B-2 Spirit bomber, the C-17 Globemaster strategic transport, the F/A-18, the Boeing 757 and Boeing 767 commercial jets.

Of all the company's activities the most profitable are the Al Yamamah contracts to supply and support the Royal Saudi Air Force. This deal produces nearly half of the company's profits, £411m ($700m) out of £980m in 2003.

In June 2003, rumours started to circulate about a possible merger with either Boeing (who acquired BAE Systems' former partner McDonnell Douglas in 1997) or Lockheed Martin. Later that year the Boeing's Chief Executive denied any possibility of a North American merger on the grounds of "conflict of interest" pertaining to the affiliation with the Airbus consortium. However, if that were the only stumbling block, it seems likely that BAE Systems would gladly sell its minority share in Airbus to gain a greater share in North American aerospace and defence projects.

The appeal of a link with a North American company is irresistible as the US defence market is by far the largest in the world. The company already has $9bn worth of sales to the Pentagon and any further move into the North American market would yield yet more. This is particularly the case if BAE Systems can win prime-contractor status on a major project. BAE Systems faces considerably fewer hurdles in this sense than their European counterparts, as there is a high degree of integration between the US and UK defence establishments.

In May 2004, it was reported that BAE Systems was considering selling its shipbuilding division, the two Clyde shipyards and the Barrow-in-Furness yard. The company would only say that it was reviewing its operations. If it decided to sell it was understood that General Dynamics would like to acquire the submarine building facilities at Barrow, while Vosper Thornycroft was said to be interested in the remaining yards. BAE Systems without its shipbuilding assets would be a more attractive partner to an American company such as Boeing - which has stated that the shipbuilding operations are of no interest to them. As of 2005 the more likely move for BAE Systems' shipbuilding operations is their merger with other British shipyards to form a "Newco" shipbuilding company.

On June 4, 2004 BAE Systems outbid General Dynamics for Alvis Vickers. What had seemed a certain win for the US company was stopped by BAE Systems' surprise move. It has been seen as an attempt to keep such a strong competitor "at bay" in BAE Systems' "backyard."

On February 20, 2005 The Observer reported that BAE Systems was considering selling its 20% stake in Airbus to pursue further acquisitions in the US; a BAE Systems source denied any such move.

On March 7, 2005 BAE Systems announced the $3.974bn acquisition of the United States defence company United Defense Industries (UDI). UDI is primarily a land systems manufacturer, boosting BAE Systems' involvement in this sector and its sales in the important North American market. UDI manufactures combat vehicles, artillery systems, naval guns, missile launchers and precision guided munitions.

Eurosystems

On January 28, 2005 BAE Systems and Finmeccanica announced the intention to dissolve their partnership in the AMS joint venture with AMS' UK and Italian operations to be taken over by the respective partners as arranged through the Eurosystems Transaction.

On May 3, 2005, the Eurosystems Transaction was finalised with:

• the UK operations of AMS (minus air traffic control and communication systems) being brought together with the C4ISR division of BAE Systems (minus communication systems) to form the new Integrated System Technologies (Insyte) division of BAE Systems.
• the communications systems portions of AMS and BAE Systems being sold to Selenia Communications, a division of Finmeccanica
• the avionics portions of BAE Systems and Finmeccanica being brought together to form the new SELEX Sensors and Airborne Systems (S&AS) joint venture held by shares of 25% and 75% respectively, with the option for Finmeccanica to later purchase the remaining 25%

Strategy

In the company's 2003 Annual Report Sir Richard Evans sums up BAE Systems' strategy since the Marconi merger:

In recent years BAE Systems has undergone a radical transformation from a UK-based aircraft manufacturer to a broadly-based systems business. Through this transformation the company has achieved a more balanced portfolio and geographic spread.

Management

In late March 2004, after more than 30 years with the company (and its predecessors), BAE Systems' longstanding Chairman Sir Richard Evans announced his successor. Dick Olver, formerly the deputy chief-executive of BP, succeeded Sir Richard on July 1, 2004.

This appointment came at a significant time with stock market confidence still recovering from a shock profit warning in December 2002. This was due to cost overruns of the Nimrod MR4 maritime reconnaissance/attack aircraft and the Astute SSN projects. BAE Systems took a hit of $1.369bn on these projects.

BAE Systems' CEO is Mike Turner, who replaced John Weston in 2002. Weston was forced out in what was a surprise move. It is understood that Turner, like Evans, has a poor working relationship with senior Ministry of Defence officials, including the Defence Secretary Geoff Hoon. Significantly the first meeting between Olver and Hoon is said to have gone well, a MoD official has said "He is a man we can do business with. We think it is good to be taking a fresh look at things." [3]

In July, 2004 Olver announced a review of all of BAE Systems' activities, which will be conducted by independent analysts lead by investment bank Morgan Stanley. This review will advise the group on what its strategy should be and hence what acquisitions or disposals it needs to make. Harry Stonecipher, former CEO of Boeing, has criticised the vertical integration of BAE Systems.

Reports in 2005 have suggested that relations between the Chairman (Olver) and CEO (Turner) are strained. These suggest that Olver has been involving himself in parts of the business which a Chairman traditionally hasn't. In June 2005 Turner heightened investor concerns of boardroom tensions by crticising Olver's knowledge of the defence industry, "[he] has a low knowledge base and knows nothing about our industry" [4]. Turner did suggest however that Olver was on a learning curve, "He'll fully understand it [in 5 years]. This is a business that takes time to understand. It's not just business, it's political." [5]

Organisation

Airbus UK

Airbus UK is a wholly owned subsidiary of BAE Systems and produces wings for the Airbus aircraft family. Airbus UK has two main sites; Broughton in North Wales carries out final assembly and Filton produces components and wing sections. Filton is also home to a retired Concorde.

Hawker Siddeley (which merged with British Aircraft Corporation (BAC) in 1977 to form British Aerospace) was part of the first Airbus projects, the Airbus A300. The British government withdrew support in 1969 but Hawker Siddeley was allowed to continue as supplier of the aircraft's wings due to the advanced stages of design and the reluctance of other nations to take over the wing design. In 1979 BAe rejoined the Airbus consortium. In 2001 Airbus Industrie became Airbus S.A.S., the Airbus Integrated Company.

Airbus UK started work on the wings for the Airbus A380 in August 2002.

BAE Systems Air Systems

Air Systems manages BAE Systems’ military aircraft projects, primarily:

• Eurofighter Typhoon
• F-35 Joint Strike Fighter
• BAE Hawk
• Nimrod MRA4

BAE Systems Integrated System Technologies

BAE Systems Integrated System Technologies (to be known informally as Insyte) was formed on May 3, 2005 by bringing together BAE Systems' interests in C4ISR and the UK operations of AMS following the Eurosystems Transaction (see Expansion & further consolidation for further details).

The division is a major supplier of defence electronics, integrated command & control (C²) systems, radar, simulators, meteorological systems, data links and C4ISR battle management systems.

BAE Systems Customer Solutions & Support

BAE Systems Customer Solutions & Support (CS&S) provides through life support and upgrades for defence forces.

• Operational Services provides spares and support for BAE Systems products including the Hawk, VC-10, Canberra, Nimrod and Jaguar aircraft as well as naval products.
• BAE Systems Australia provides the same services as the wider CS&S organization but is based in Australia.
• Training Solutions provides a wide range of services. This includes simulator construction and support and operation of the RAF’s North Sea Air Combat Manoeuvring Instrumentation (AMCI) Range.
• CS&S Naval provides maintenance, repairs, minor and major refits for naval vessels. Past projects include reactivation of the Upholder class, now reactivated as the Victoria Class submarines for the Canadian Government, and Vanguard class upgrades. CS&S Naval has completed the reactivation of the Royal Navy's Type 22 Frigates for Romania.

The RAF Tornado GR4 upgrade is an excellent example of the work undertaken by the CS&S division.

BAE Systems Land Systems

BAE Systems Land Systems was created in 2004 to consolidate BAE Systems’ land warfare systems expertise by bringing together RO Defence and the newly acquired Alvis Vickers. This group provides Armoured vehicles, explosives, Artillery Ammunition, Mortars, Small Arms, Naval Ammunition Launchers, Warheads (e.g. BROACH), Multiple Launch Rocket Systems, Tank and Artillery Ordnance, Electronic Systems.

With the acquisition of United Defense Industries in 2005 Land Systems became part of BAE Systems Land and Armaments, based in Arlington, VA, USA.

BAE Systems Naval Ships

Formed in 2003 BAE Systems Naval Ships was formed to centralise BAE Systems' shipbuilding operations. This new company took the surface vessel shipyards at Scotstoun and Govan, formerly part of BAE Systems Marine. At the same time the Barrow shipyard, BAE Systems Marine (VSEL), became part of BAE Systems Submarines (see below).

As well as services, construction products include:

• Royal Navy Future Carrier (CVF)
• Type 45 Destroyer
• Offshore patrol vessels

BAE Systems North America

BAE Systems North America’s headquarters are in Rockville, Maryland and the division has facilities in 30 US states and Washington D.C. Perhaps the single most important division of BAE Systems, it is the business which gives BAE Systems access to the American aerospace and defence market. This is important due to the unmatched $400bn spent on defence by the US government. This has led to a situation where BAE Systems' North American operations now account for approximately 30% of the company’s profits while its UK operations (its "home market") now accounts for less than 25%.

Businesses purchased in the US by the former GEC businesses before the merger and BAE Systems after the merger include:

• 1998 - Tracor
• 2000 - Lockheed Martin Control Systems (LCMS)
• 2003 - Advanced Power Technologies, Inc (APTI)
• 2003 - MEVATEC
• 2004 - STI Government Systems
• 2004 - Boeing Commercial Electronics
• 2004 - DigitalNet Holdings Inc
• 2004 - ALPHATECH
• 2005 - United Defense Industries

BAE Systems Regional Aircraft

BAE Systems Regional Aircraft produced the last fully UK-built airliner in November 2001, the Avro RJX (formerly the BAE 146). While this unit no longer produces aircraft it continues to lease aircraft and provide support, spares and training for its products, the

• Avro RJ/BAE 146 family
• BAe ATP
• Jetstream
• BAe 748

BAE Systems Shared Services

BAE Systems Shared Services is the group with BAE Systems responsible for managing resources and directing operations. It manages BAE Systems’ car and aircraft fleets, employee payroll, services and benefits. Shared Services also manages BAE Systems’ Advanced Technology Centre and the company’s IT & e-services contracts. An important part of the company is Property & Environmental Services which manages BAE Systems’ own property and provides specialist services such as defence site decommissioning.

BAE Systems Submarines

BAE Systems Submarines, until 2003 a unit within BAE Systems Marine, is responsible for the development and production of the Astute class submarine. The submarines are constructed at BAE Systems’ yard at Barrow-in-Furness. The Astute class is a new generation of nuclear attack submarine (SSN) for the Royal Navy. The order for the initial batch of three ships was place in 1997, with Vickers Shipbuilding and Engineering, since absorbed into BAE Systems .

BAE Systems Underwater Systems

This company is responsible for BAE Systems’ extensive range of underwater warfare products:

• Stingray torpedo
• Spearfish torpedo
• Remote minesweepers
• Acoustics countermeasures

BAE Systems Platform Solutions

Platform Solutions is based in the US as part of BAE Systems North America with facilities in the UK. The company provides vehicle management, power systems, guidance and control interfaces for vehicles, aircraft and UAVs.

Atlas Elektronik

Atlas Elektronik, a German marine systems business, is a wholly owned subsidiary of BAE Systems. The company is based in Bremen.

Gripen International

Formed in 2001, Gripen International is a joint company for the marketing of the JAS-39 Gripen fighter. This co-operation dates back to 1995 when Saab and British Aerospace established a joint venture for Gripen export marketing.

MBDA UK

BAE Systems holds a 37.5% share interest in the World's secong largest missile systems manufacturer, MBDA. The remaining shares are held by EADS (37.5%) and Finmecannica (25%).

SELEX Sensors and Airborne Systems

SELEX Sensors and Airborne Systems (SELEX S&AS), a joint venture with Finmeccanica in which BAE Systems has a 25% stake, was formed in May 2005 (see Expansion & further consolidation. SELEX S&AS incorporates the majority of the former BAE Systems Avionics business. Primary businesses are; airborne radar systems, Electronic Warfare (EW) systems, military lasers and electro-optical systems.

Shareholdings

• Airbus S.A.S. (20%)
• Eurofighter Jagdflugzeug GmbH (33%)
• MBDA (37.5%)
• Saab Military Aircraft (20.5%)
• SELEX Sensors and Airborne Systems (25%)

Products

BAE Systems is in an enviable position. The company either leads or has a major stake in some of the most high profile, high technology civil and military aerospace and maritime projects in the world. This is not a complete list, only major projects are included.

Some are:

Air

• Airbus
  BAE Systems manufactures the wings for the entire Airbus family, the A300, A310, A318, A319, A320, A321, A330, A340, A350 (yet to be formally launched) and A380 (right).
• Airbus A400M
  Strategic airlifter to compete with 1st generation C-130 Hercules. Produced through Airbus Military.
• BAE Hawk
  Advanced jet trainer/light attack. See also T-45 Goshawk, aircraft carrier-ready Hawk variant for the United States Navy
• BAE Nimrod MRA4
  Upgraded Nimrod MR2 maritime patrol aircraft. Suffering from massive cost increases and delays.
• Eurofighter Typhoon
  Produced with EADS and Alenia Aeronautica, advanced air-to-air fighter with air-to-ground capabilities.
• F-35 Joint Strike Fighter
  Produced with Lockheed Martin Aeronautics and Northrop Grumman.
• Tornado GR4
  Primary RAF strike aircraft, recently upgraded from GR1 standard. Addition of MBDA's Brimstone and Storm Shadow missiles will increase the potency of the aircraft.
• Tornado F3
  Primary RAF air defence aircraft (to be replaced by Typhoon)
• Harrier GR7/GR9
  Offensive support aircraft. GR9 is an avionics and weapons upgrade of the standard GR7 to allow carriage of the latest smart weapons, new inertial navigation and Global Positioning Systems
• Sea Harrier FA2
  Marinised Harrier, primarily air defence

Land

• BAE Systems Land and Armaments
  • BAE Systems Land Systems
    • Challenger II
    • M777 howitzer

• • United Defense
    • Advance Gun System (AGS) for next generation United States Navy surface combatants
    • CAESAR advanced artillery system
    • M2 Bradley Infantry Fighting Vehicle
    • M3 Bradley Cavalry Fighting Vehicle
    • M109 Paladin
    • M113 Family
    • Crusader
    • Mk41 Vertical Launching System (VLS)
    • Bofors Defence
      • 155mm Field Howitzer
      • Ammunition
      • Guns and turrets

Sea

• Astute class submarine
  Next generation Royal Navy nuclear-powered attack submarine
• Type 45 Destroyer
  Next generation Royal Navy air defence destroyer, armed with the PAAMS missile defence system.
• Royal Navy CVF
  Future aircraft carrier, produced together with the Thales Group.

Future

• Future Offensive Air System
  BAE Systems seem well placed to provide the replacement for the Tornado in the deep strike role. This is due for delivery around 2018.