Corporate Profile: The name of the game

There was British Aerospace. And there was Marconi Electronic Systems. And now there is Baesystems. The B used to stand for British, but it doesn't anymore. Confused? You shouldn't be. It all makes perfect sense

The setting chosen to announce the corporate demise of Britain's leading aerospace company could not have been more appropriate. The Banqueting Suite in Whitehall has seen some memorable departures in its time, most notably the beheading of Charles I. Yesterday it was our turn to bid farewell to British Aerospace and say hello to Baesystems. After two decades, it has been decreed that the words British and Aerospace are no longer appropriate to describe our biggest defence contractor.

It could have been worse and it very nearly was. British Aerospace could have suffered the same fate as British Steel, which emerged with the utterly meaningless name of Corus after the corporate image consultants had done their expensive worst. Striking it may not be. But at least Baesystems - a conflation of BAe and Marconi Electronic Systems - retains a link with its heritage while offering a clue to its future, which will be all about supplying complete defence systems.

With the pounds 6bn acquisition of GEC's defence electronics business complete, Baesystems is no longer British, other than in the sense that it is domiciled here. North America now accounts for a bigger share of its pounds 12.3bn sales than the UK and a third of the new company's 115,700-strong workforce is located abroad. Nor is it solely an aerospace contractor. The merger with GEC has brought three warship yards and a factory making howitzers into the portfolio.

The new identity has been forged primarily with the US - the world's biggest defence market - in Baesystems' sights. Both BAe and GEC have enjoyed long and profitable relationships with the Pentagon, albeit on a modest scale. BAe has had a continuous presence in the US since 1951, when Vickers opened an office in Washington DC. It chose the city not because of the defence market, or the proximity of the Pentagon, but because Capital Airlines had purchased Viscount airliners, the first turboprop airliner to go into production, and the first British commercial airplane to enter service in America.

Since then, it has expanded its military presence, supplying the US Marine Corps with Harrier AV8Bs in collaboration with McDonnell Douglas. It also owns Reflectone, a high-tech company in aviation training and simulation. Royal Ordnance is the operating contractor for the Holston Army Ammunition Plant, the only supplier of high explosives to the US military. But GEC- Marconi had more than 10 times as many employees in North America, with 17,000 staff, swollen by the purchase of Tracor, a Texas-based defence electronics firm for $1.4bn (pounds 800m) in 1998. Baesystems will inherit that corporate DNA, starting life with 18,300 employees and sales of pounds 2.75bn a year in the US.

But there is more to play for than that. At a dinner a month ago, the Deputy US Defense Secretary, John Hamre, told Baesystems' chief executive, John Weston, that his company would henceforth be regarded as American when bidding for US defence contracts. Moreover, he positively encouraged Mr Weston to acquire other US defence contractors in order to provide more competition with the three domestic behomeths of the US defence industry - Lockheed Martin, Boeing and Raytheon.

A transatlantic mega-merger involving one of those three may still be a long way off. But now that Europe has coalesced into two dominant groupings - Baesystems and the newly-created European Aeronautics Defence and Space Company (Eads) - then the creation of a handful of global players begins to look less a dream and more a possibility. Mr Weston says: "In terms of sales, Baesystems will be the same size as the Eads. We are reaching the end game. The US majors will have to chose between the two of us. At some point we need to do a big deal across the Atlantic but we cannot do that unless and until the US is prepared to be dependent on European technology."

There is the rub. The market for defence goods is global in name only at present. There are still huge divisions between national markets, shaped by national industrial practices, the close relationships between governments and companies, local political sensitivities and just plain chauvinism.

That is particularly true in Europe. But equally, there is only one large market which really matters at the moment: America. The Pentagon is experiencing the first real increases in defence spending since the Gulf War and is gearing up for very large new projects headed by the Joint Strike Fighter (JSF), a programme potentially worth a mind-boggling $100bn. Baesystems is teamed with Lockheed Martin on the JSF, which might seem to qualify it as the most logical merger partner. But, then again, Baesystems is being careful to distribute its eggs among several baskets.

If Boeing, and not Lockheed, is selected to build the JSF, then Baesystems would almost certainly attempt to switch allegiances. Moreover, it has just brought Boeing into its Meteor consortium which is bidding for the pounds 1bn contract to arm the Eurofighter in competition with Raytheon.

Northrop Grumman is one possible target, but Bae has already indicated this would be relatively unattractive. It would fail to give the company clout in the projects which really matter. The obsession with the other side of the Atlantic is understandable, given Mr Weston's oft-repeated assertion that the defence industry will one day be carved up between a handful of global players with transatlantic reach.

Baesystems has further fuelled the impression that it has lost interest in Europe by turning its back on a merger with DaimlerChrysler Aerospace in favour of its all-British alliance with GEC. But Europe will still figure large in Baesystems. Along with Aerospatiale Matra of France and Alenia of Italy, it will be a partner in Europe's biggest missiles producer with 10,000 employees and sales of pounds 1.5bn. Baesystems has also brought other European defence companies into its orbit of control, acquiring a 40 per cent holding in Saab's aerospace operations.

But Baesystems' biggest single exposure to the European aerospace scene remains its 20 per cent holding in the civil aircraft manufacturer Airbus Industrie. Once the whipping boy for successive British Aerospace chief executives, Airbus has now become the apple of its eye. This is due in no small measure to Airbus's success in raising its market share from 14 per cent seven years ago to 60 per cent today. As Mr Weston said recently: "Airbus has gone from being a subsidised European joke to the toughest competitor anywhere in the world."

And yet doubts persist about Baesystems' long-term commitment to the consortium. First, it is now much more weighted towards the defence sector. Second, it has suddenly gone from being one of four industrial partners in Airbus to a very junior shareholder. The merger of the three other Airbus partners, Aerospatiale Matra, Dasa of Germany and Casa of Spain to create the new Eads has created one dominant shareholder in the consortium with a total holding of 80 per cent.

The emergence of the Eads has made some wonder whether there is any need any longer to press ahead with plans to turn Airbus into a single corporate entity. It has also provoked renewed consortium infighting. Baesystems has objected to the appointment of Noel Forgeard, the chief executive of Airbus, to a parallel post as head of the Eads' commercial aircraft operations on the not unreasonable grounds that he will have a conflict of interests.

Because each partner in Airbus has one vote, irrespective of its size, Baesystems can block any changes Eads cares to make. One solution that has been mooted is for Baesystems to increase its shareholding to 30 per cent in return for giving up its power of veto. Sir Richard Evans, the chairman of Baesystems, insisted yesterday that 30 per cent was not a figure he recognised although he clearly believes that, if Airbus ever converts to a public company, then the British share of the company should be more than 20 per cent.

Asked yesterday what his goal was for Baesystems, Mr Weston said his aim was to repeat the phenomenal growth in shareholder value BAe achieved in the mid-1990s as it grew its defence business, jettisoned much of its loss-making civil aircraft activities and trimmed back corporate overheads.

The pounds 275m of cost savings and 1,500 job cuts it has so far identified are a start. Meanwhile the City waits for the one big deal that will make Baesystems into a global player - an presumably mean another change of corporate identity.

Fact File

Market capitalisation: pounds 10.7bn

Turnover: pounds 12.3bn, (pro forma) for 1998. Split is 34% Middle East, 22% US, 17% UK, 15% Europe, 10% Asia Pacific

Profits: pounds 1.14bn

Main businesses: Baesystems is the world's second-biggest defence contractor and fourth biggest aerospace and defence group. Its interests range from military and commercial aircraft to warship yards, missile systems (above) and munitions. It owns a 20% stake in Airbus Industrie. The main products are the Tornado and Eurofighter Typhoon military jets; Airbus commercial airliners; and Avro RJ regional jet; the Hawk trainer jet; Type 23 frigates; howitzers; Trident nuclear submarines; Heckler & Koch small arms; Blue Kestrel radar and Spearfish torpedoes

Key executives: Sir Richard Evans, chairman; John Weston, chief executive; Mike Turner and Peter Gershon; joint chief operating officers

Employees: 100,000 (plus 15,700 in joint ventures)

British Aerospace's flight path to Baesystems

April, 1977: British Aerospace formed as a nationalised corporation following the merger of the British Aircraft Corporation, Hawker Siddeley Aviation, Hawker Siddeley Dynamics and Scottish Aviation

February, 1981: Mrs Thatcher privatises BAe, selling 52 per cent stake through stock market flotation. Limit on foreign shareholdings of 15 per cent (now raised to 29.5 per cent)

April, 1982: Becomes industrial partner in the Airbus Industrie consortium with a 20 per cent shareholding

May, 1985: Government sells remaining BAe shareholding but retains a "golden share" to prevent BAe falling under foreign control

April, 1987: Acquires armaments manufacturer Royal Ordnance for pounds 190m

1988: Buys Rover Group for pounds 150m, with pounds 800m of debt written off. Subsequent furore over "sweeteners" linked to sale. First development contract for Eurofighter (right), with Germany, Italy and Spain

March, 1991: Buys German small arms manufacturer Heckler & Koch

March, 1994: Sells Rover to BMW of Germany for pounds 800m

August, 1996: Forms guided weapons systems joint venture with Matra of France called Matra BAe Dynamics

October, 1997: Acquires Siemens Plessey defence interests in UK and Australia for pounds 319m

March, 1998: Nets pounds 764m from sale of 16 per cent stake in Orange mobile phone firm

April, 1998: GEC acquires Tracor, US defence contractor, for pounds 800m. BAe buys 35 per cent stake in Swedish aerospace company Saab for pounds 269m

October, 1998: Sells property arm, Arlington Securities, for pounds 285m

January, 1999: Agrees pounds 6bn acquisition of GEC's defence electronics business, Marconi Electronic Systems

November, 1999: Completes merger with Marconi Electronic Systems and changes name to Baesystems