BAE Systems to battle on after merger plan

British arms maker BAE Systems was Wednesday forced to soldier on under the guidance of an embattled chief executive after the collapse of its proposed mega-merger with European aerospace giant EADS. After ending tie-up talks owing to a lack of accord with "various" government stakeholders, BAE's immediate future was one of a company thrust back into an environment of falling defence spending by governments. The London-listed firm insisted that it was not looking to merge with an alternative partner.BAE chief executive Ian King said: "We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defence and security group. "However, our business remains strong and financially robust. We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate. We remain committed to delivering total shareholder value and look to the future with confidence," he added. Just this week, the biggest shareholder in BAE Systems, fund manager Invesco Perpetual, warned that it had "significant reservations" over the tie-up. Invesco said it did not understand the strategic logic for a combination, adding that it would "jeopardize BAE's unique and privileged position in the United States defence market." Joshua Raymond, chief market strategist at City Index trading group, said Wednesday that "the immediate focus now switches to the strength of the BAE Systems board and indeed of Ian King with major shareholder Invesco, who owns 13.3 percent of BAE, already voicing strong opposition to both the merger and the current strategy of the BAE board itself." BAE's share price fell by 1.38 percent to close at 320.90 pence on London's FTSE 100 index of leading companies, which gave up 0.58 percent to 5,776.71 points. BAE shares had traded for 328.70 pence a day before the merger talks announcement was made on September 12. ---- Defence sector under pressure from budget cutbacks ---- "BAE and its Western competitors still face the same challenges", noted Guy Anderson, senior analyst at defence industry consultants IHS Jane's. "Defence spending in Europe and the US is on a downward trajectory. Companies with high exposure to defence markets, and with little exposure to the recovering commercial industrial and aerospace markets, will need to convince investors that they have viable survival plans. "For BAE, the continued sale of businesses gathered during the heady acquisitions boom of the 2000s is probable." British defence minister Philip Hammond agreed that the group was suffering from state cutbacks around the world. BAE Systems "has a great future as a defence and technology company but of course it operates in a world where many defence budgets are being reduced," Hammond told the BBC. "It's going to have to evolve its business model to be effective in a different climate in the future. That's the challenge for the management team," he added. BAE Systems was created in November 1999 when British Aerospace bought Marconi Electronic Systems, the defence arm of GEC telecoms group, and relaunched itself under the new name. The London-listed group has since rapidly expanded and is now an expert in the field of defence and security, whereas most of EADS's work is in the commercial sector with its Airbus jet division. BAE was originally a member of the Airbus consortium, but sold its 20-percent stake back to EADS in 2006 and concentrated on defence. The British group now manufactures a host of products ranging from military transporters to Bradley fighting vehicles, Challenger tanks and Queen Elizabeth aircraft carriers. BAE is also part of the Eurofighter Typhoon consortium that includes the German and Spanish subsidiaries of EADS, as well as Italy's Finmeccanica. In addition, BAE has ramped up its focus on the United States, with the acquistion of United Defense Industries for $4.192 billion in 2005, and Armor Holdings for $4.1 billion in 2007. The US market now accounts for about half, or 45 percent, of BAE Systems' total group revenues, making it the biggest foreign supplier of military goods to the Pentagon. The group has axed 22,000 jobs over the past three years in response to reduced military spending.