BAE Systems

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BAE Systems plc
Type Public ( LSE: BA., OTCBB: BAESY)
Founded 30 November 1999
Headquarters Farnborough, Hampshire, UK
Key people Dick Olver, Chairman
Mike Turner, CEO
Industry Aerospace and defence
Products Civil and military aerospace
Defence electronics
Naval vessels
Land warfare systems
Revenue GB£15,411 million (2005)
Operating income GB£1,182 million
Net income GB£583 million
Employees 100,100
Subsidiaries BAE Systems Inc.

BAE Systems plc is the world's fourth largest defence contractor and a commercial aerospace manufacturer. BAE is a British company based at Farnborough, which has extensive worldwide interests, particularly in North America through its subsidiary BAE Systems Inc. BAE was formed on 30 November 1999 with the merger of British Aerospace (BAe) and Marconi Electronic Systems (MES), the defence arm of The General Electric Company (GEC).

BAE is the successor to many iconic aircraft and defence electronics companies, including The Marconi Company, the first commercial company devoted to the development and use of radio; A.V. Roe and Company, one of the world's first aircraft companies; and Supermarine, the manufacturer of the renowned Supermarine Spitfire. BAE has increasingly disengaged from its businesses in continental Europe in favour of investing in the United States. Since its formation it has sold its share of or dissolved the companies Astrium, AMS, Atlas Elektronik and most significantly its 20% share of Airbus SAS.

BAE Systems is involved in several major defence projects, for example the F-35 Lightning II, the Eurofighter Typhoon and the Royal Navy future carriers. BAE has been the subject of criticism, both general opposition to the arms trade and also specific allegations of unethical and corrupt practices, including the Al Yamamah contracts with Saudi Arabia that have earned BAE and its predecessor GB£43 billion in twenty years.


The merger of British Aerospace and Marconi Electronic Systems was announced on 19 January 1999. MES was acquired by British Aerospace for GB£7.7 billion.


Evolution of UK aviation, 1955 to BAE Systems formation in 1999 (includes naval acquisitions)
Evolution of UK aviation, 1955 to BAE Systems formation in 1999 (includes naval acquisitions)
Evolution of the land systems division of BAE Systems, 1970s to Land & Armaments formation
Evolution of the land systems division of BAE Systems, 1970s to Land & Armaments formation
The evolution of the British shipbuilding industry, including BAE Systems Naval Ships and BAE Systems Submarines
The evolution of the British shipbuilding industry, including BAE Systems Naval Ships and BAE Systems Submarines

As a result of the British Aerospace-MES merger, BAE Systems is the successor to many of the most famous British aircraft, defence electronics and warship manufacturers.

Marconi Electronic Systems had a heritage of almost 100 years. Following GEC's acquisition of Marconi in 1968 the Marconi brand was used for its defence businesses, e.g., Marconi Space & Defence Systems (MSDS) and Marconi Underwater Systems Ltd (MUSL). GEC's history of military products dates back to World War I with its contribution to the war effort then including radios and bulbs. World War II consolidated this position, as the company was involved in important technological advances, most notably radar. Between 1945 and the British Aerospace merger in 1999, the company became one of the world's most important defence contractors. GEC's major defence related acquisitions included Associated Electrical Industries in 1967, English Electric (including its Marconi subsidiary) in 1968, Yarrow Shipbuilders Limited in 1985, parts of Ferranti's defence business in 1990, Vickers Shipbuilding and Engineering in 1995 and Kværner Govan in 1999. In June 1998, MES acquired Tracor, a major American defence contractor, for US$1.4 billion.

British Aerospace was the result of massive consolidation of UK aircraft manufacturers since World War II. British Aerospace was formed on 29 April 1977 by the nationalisation and merger of The British Aircraft Corporation, the Hawker Siddeley Group and Scottish Aviation. Both BAC and Hawker Siddeley were themselves the result of various mergers and acquisitions; BAC incorporated English Electric Aviation Ltd, Vickers-Armstrong (Aircraft), the Bristol Aeroplane Company and Hunting Aircraft, while Hawker Siddeley was formed by Hawker Aircraft's purchase of aviation businesses including Gloster Aircraft, Armstrong Whitworth Aircraft, A V Roe and later merger with de Havilland in 1959. The acquisition of Folland and Blackburn Aircraft followed, and in 1960 this group was consolidated as the Hawker Siddeley Group.


It was widely anticipated that British Aerospace would merge with Germany’s DASA to form a pan-European aerospace giant. A merger deal was negotiated between Richard Evans and DASA CEO Jürgen Schrempp. However when it became clear that GEC was selling its defence electronics business Marconi Electronic Systems, Evans put the DASA merger on hold in favour of purchasing Marconi. Evans stated that in 2004 that his fear was that an American defence contractor would acquire Marconi and challenge both British Aeropspace and DASA. Schrempp was angered by Evans' actions and chose instead to merge DASA 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.

The attraction of MES may well have been Tracor, which was the largest European defence purchase in the United States at that point. The creation of a UK company, compared with what would have been a British–German firm, made the possibility of penetrating the US defence market more likely. Since its creation the company has steadily increased its investment in and revenues from the US. At the same time, continental European companies have made limited moves into that 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.

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."

BAE Systems inherited the "special" shareholding that was established when British Aerospace was privatised. This special share, with a nominal value of GB£1, is held on behalf of the Secretary of State for Trade and Industry. This shareholding prevents amendments of certain parts of the company's Articles of Association without the permission of the Secretary of State. These Articles require that no foreign person or persons acting together may hold more than 15% of the company's shares or control the majority of the board; the CEO and the Chairman of BAE Systems must be British nationals.

Expansion and restructuring

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 III strategic transport, the F/A-18 Hornet, the Boeing 757 and Boeing 767 commercial jets. Another acquisiton was Lockheed Martin Aerospace Electronic Systems, completed in November 2000. BAE has long been the subject of press reports linking it to major North American defence contractors, including Boeing, Lockheed Martin and General Dynamics. The company's shipbuilding assets (and Airbus in the Boeing context) have been named as blocks to any merger. The appeal of a link with a North American company is strong as the US defence market is by far the largest in the world. 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 2000 Matra Marconi Space, a joint BAE/ Matra company, was merged with the space division of DaimlerChrysler Aerospace AG to form Astrium. On 16 June 2003 BAE sold its 25% share to EADS, making EADS the sole shareholder. Astrium was renamed EADS Astrium.

In November 2001, BAE announced the closure of the Avro Regional Jet ( Avro RJ) production line at Woodford and the cancellation of the Avro RJX, an advanced series of the aircraft family. The final Avro RJ to be completed became the last all-British civil airliner. BAE continues to support operators of its products through BAE Systems Regional Aircraft. In December 2001 BAE's missile businesses were merged into MBDA, in which it acquired a 37.5% stake. This included its share of the joint ventures Matra BAe Dynamics and Alenia Marconi Systems (missile division only).

In June 2002, BAE confirmed it was in takeover discussions with TRW, an American aerospace, automotive and defence business. This was prompted by Northrop Grumman's GB£4.1 billion (approx. US$6 billion c.2002) hostile bid for TRW in February 2002. A bidding war between BAE, Northrop and General Dynamics ended on 1 July 2002 when Northrop's increased bid of GB£5.1 billion was accepted. In December 2002, BAE issued a shock profit warning due to cost overruns of the Nimrod MR4 maritime reconnaissance/attack aircraft and the Astute SSN projects. BAE Systems took a charge of GB£750 million against these projects.

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. 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. As of 2006 the more likely move for BAE Systems' shipbuilding operations is their merger with other British shipyards to form a "Newco" shipbuilding company.

On 4 June 2004, BAE Systems outbid General Dynamics for Alvis Vickers, the UK's main manufacturer of munitions and armoured vehicles. What had seemed a certain win for the US company was stopped by BAE Systems' surprise move. On 7 March 2005 BAE Systems announced the GB£2.25 billion (approx. US$4.2 billion c.2005) acquisition of the USA defence company United Defense Industries (UDI). UDI, a major competitor to General Dynamics, is primarily a land systems manufacturer, boosting BAE Systems' involvement in this sector. UDI, now BAE Systems Land and Armaments, manufactures combat vehicles, artillery systems, naval guns, missile launchers and precision guided munitions.

In December 2005, BAE announced the sale of its German naval systems subsidiary, Atlas Elektronik, to ThyssenKrupp and EADS. The sale was complicated by the requirement of the German government to approve any sale as acceptable. The Financial Times described the sale as "cut price" due to the fact that French company Thales bid 300 million, but was blocked from purchasing Atlas on national security grounds. On 31 January 2006 BAE announced the sale of BAE Systems Aerostructures to Spirit AeroSystems, Inc. BAE said as early as 2002 that it wished to dispose of what it did not regard as a "core business".


In July 2003 BAE Systems and Finmeccanica announced their intention to set up three joint venture companies collectively to be known as Eurosystems. These companies would have pooled the avionics, C4ISR and communications businesses of the two companies. The difficulties of integrating the companies in this way lead to a re-evaluation of the proposal, BAE's 2004 Annual Report states that "recognising the complexity of the earlier proposed Eurosystems transaction with Finmeccanica we have moved to a simpler model." The main part of this deal was the dissoloution of AMS.

Airbus shareholding

BAE Systems inherited British Aerospace's share of Airbus Industrie, which consisted of two factories at Broughton and Filton. These facilities manufactured wings for the Airbus family of aircraft. In 2001 Airbus was incorporated as Airbus SAS, a joint stock company. In return for a 20% share in the new company BAE Systems transferred ownership of its Airbus plants (now known as Airbus UK) to the new company.

BAE has long been the subject of press reports regarding the future of its 20% share of Airbus. The Economist's "The World in 2006" said BAE was "almost certain to sell" its Airbus share to EADS in 2006 to fund a major U.S. acquisition and named L-3 Communications as an "obvious candidate". Despite denials by the company the BBC reported on 2006- 04-06 that BAE was indeed to sell its stake, then "conservatively valued" at GB£2.4 billion.

Due to the slow pace of informal negotiations BAE exercised its put option which saw investment bank Rothschild appointed to give an independent valuation. Six days after this process began, Airbus annouced delays to the A380 which caused a 26% collapse in the EADS share price and hence in the value of Airbus SAS. On 2006- 07-02 Rothschild valued BAE's share at GB£1.9 billion, well below BAE's, analysts' and even EADS' expectations. On 6 September 2006, BAE board announced it would recommend to shareholders to sell its share for GB£1.87 billion. On 4 October 2006, shareholders voted in favour of the sale, which was completed on 13 October.

Recent events

With BAE's GB£2.5 billion purchase of United Defense in 2005 BAE added the M2/M3 Bradley family of armoured vehicles to its product line.
With BAE's GB£2.5 billion purchase of United Defense in 2005 BAE added the M2/M3 Bradley family of armoured vehicles to its product line.

On March 23, 2006 BAE and VT Group announced to the stock exchange that they were considering a joint bid for Babcock International. On May 10, 2006, BAE Systems abandoned the plan because "the economics of a deal do not create sufficient value for BAE Systems or the other parties".

On March 16, 2006 the Financial Times reported the possible sale of BAE's 37.5% share of MBDA. The paper reported that EADS is keen to take full control of the joint venture by acquiring the BAE share and Finmeccanica's 25%.

One of BAE's major aims, as highlighted in the 2005 Annual Report, was the granting of increased technology transfer between the UK and the US. The JSF programme became the focus of this effort, with British government ministers such as Lord Drayson, Minister for Defence Procurement, suggesting the UK would withdraw from the project without the transfer of technology that would allow the UK to operate and maintain F-35s independently. On May 27, 2006 President Bush and Prime Minister Tony Blair issued a joint statement which announced "Both governments agree that the UK will have the ability to successfully operate, upgrade, employ, and maintain the Joint Strike Fighter such that the UK retains operational sovereignty over the aircraft."

On August 18, 2006 Saudi Arabia signed a contract for 72 Eurofighter Typhoons, to be delivered by BAE Systems. Reports suggests the contract is worth GB£6 billion to GB£10 billion to UK industry. On 10 September 2006 BAE won a GB£2.5 billion contract for the upgrade of 80 RSAF Tornado IDSs.

On September 6, 2006 BAE announced it was selling its 20% stake in Airbus to EADS, which already owned the remaining 80%, for GB£1.87 billion. On 4 October shareholders voted in favour and the sale was completed on 13 October 2006.


BAE Systems is a partner in the F-35 Lightning II programme
BAE Systems is a partner in the F-35 Lightning II programme

BAE Systems either leads or has a major stake in some of the world's most high profile, high technology aerospace, land warfare and maritime projects. BAE Systems' interests in commercial aviation are vested in BAE Systems Regional Aircraft. BAE Systems Regional Aircraft no longer produces aircraft, however it continues to lease and support its products, the Avro RJ/BAE 146 family, BAe ATP, Jetstream and BAe 748. BAE plays important roles in military aircraft production. The company's Eurofighter Typhoon, Panavia Tornado and Harrier fighter-bombers are all front line aircraft of the Royal Air Force. BAE is a major partner in the F-35 Lightning II programme. Its Hawk advanced jet trainer aircraft has been widely exported.

BAE Systems Land Systems manufactures the British Army's Challenger II, Warrior Tracked Armoured Vehicle, M777 howitzer, Panther Command and Liaison Vehicle and L85 Assault Rifle. BAE Systems Land and Armaments manufactures the M2/M3 Bradley fighting vehicle family, the United States Navy Advanced Gun System (AGS) and the M109 Paladin.

Major naval projects include the Astute class submarines, the Type 45 air defence destroyer and the future aircraft carrier.

Position in its markets

BAE Systems is the predominant supplier to the UK Ministry of Defence (MOD), being the only company to receive more than GB£1 billion from the MOD in 2004/2005. Since its creation BAE Systems has had a difficult relationship with the MOD. This has been attributed to deficient project management by the company, but also in part to the deficiencies in the terms of "fixed price contracts". BAE CEO Mike Turner said in 2006 "We had entered into contracts under the old competition rules that frankly we shouldn’t have taken." These competition rules were introduced by Lord Levene during the 1980s to shift the burden of risk to the contractor and were in contrast to "cost plus contracts" where a contractor was paid for the value of its product plus an agreed profit. However BAE and its predecessors grew, particularly in the 1990s, to the point where not only were they leading suppliers to the MOD, but also more competitive internationally.

In December 2005 the MOD published the Defence Industrial Strategy (DIS) which has been widely acknowledged to recognise BAE as the UK's "national champion". The DIS identifies key industrial capabilities which must be maintained within the UK through long-term government commitments to support research spending and procurement. Of these capabilities, several are dominated by BAE, including naval vessels and submarines, armoured fighting vehicles (over 95% of the UK’s AFVs are BAE products), fixed wing aircraft, general munitions (with the exception of certain "niche capabilities abroad") and Network Enabled Capability (defined as C4ISTAR in the DIS).

After the publication of the DIS BAE Systems CEO Mike Turner said "If we didn't have the DIS and our profitability and the terms of trade had stayed as they were... then there had to be a question mark about our future in the U.K."

BAE now sells more to the US Department of Defense (DOD) than the UK MOD and by 2006 had become the seventh largest supplier to the DOD. The company has been allowed to buy important defence contractors in the United States, however its status as a UK company requires that its US subsidiaries are governed by American executives under Special Security Arrangements.

Corporate governance

As of February 2006 the members of the board of directors of BAE Systems were: Dick Olver (Chairman), Sue Birley, Phil Carroll, Ulrich Cartellieri, Chris Geoghegan, Michael Hartnall, Michael Lester, Peter Mason, Steve Mogford, Roberto Quarta, Mark Ronald, George Rose, Mike Turner ( CEO), and Peter Weinberg.

After more than 30 years with the company and its predecessors, BAE Systems' longstanding Chairman Sir Richard Evans announced his successor in March 2004. Dick Olver, formerly the deputy chief-executive of BP, succeeded Evans on 1 July 2004. This appointment came at a significant time with stock market confidence still recovering from the shock profit warning of December 2002.

Mike Turner 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, (for example with former Defence Secretary Geoff Hoon). Significantly the first meeting between Olver and Hoon was said to have gone well, a MoD official commented "He is a man we can do business with. We think it is good to be taking a fresh look at things."

Reports in 2005 suggested that relations between the Chairman (Olver) and CEO (Turner) were strained. In June 2005 Turner heightened investor concerns of boardroom tensions by criticising Olver's knowledge of the defence industry, "[he] has a low knowledge base and knows nothing about our industry". 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."

Financial information

Table 1 BAE Systems five year results (source BAE Systems Annual Report 2005)
Year ended Turnover (GB£ million) Profit/(loss) before tax (GB£m) Net profit (GB£m) Earnings per share (p)
31 Dec 2005[i] 15,411 845 555 22.5
31 Dec 2004[i] 13,222 730 3 17.4
31 Dec 2003 15,572 233 8 16.6
31 Dec 2002 12,145 (616) (686)[ii] 17.3
31 Dec 2001 13,138 70 (128) 23.4

[i]: IFRS. 2003, 2002 and 2001 data prepared using UK GAAP procedures.
[ii]: Reflects GB£750 million charges for problems with Nimrod MRA4 (GB£500 million) and Astute class submarine (GB£250 million) programmes.

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 contributes substantially to the company's profits; it was 42% in 2003.

Merger undertakings

Various undertakings were given by BAE Systems to the Department of Trade and Industry which prevented a reference of the merger to the Monopolies and Mergers Commission.Ordinarily merger decisions are taken by the European Commission, however EC Merger Regulation Article 296 allows member states to take any decisions relevant to national security. The EC granted its approval of the non-military aspects in June 1999.

  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 British Aerospace 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.
  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.

In 2006 the Office of Fair Trading announced it had launched a review of the undertakings to determine whether "the undertakings are still appropriate or need to be varied or superseded, or whether BAE Systems can be released from them." This follows BAE questioning the "continued relevance of a number of the undertakings" given the changes in the defence industry since 1999.


HMS Coventry was one of two frigates sold to Romania. The terms of the sale have been controversial.
HMS Coventry was one of two frigates sold to Romania. The terms of the sale have been controversial.

Like many arms manufacturers, BAE has received criticism from various human rights and anti-arms trade organisations due to the human rights records of governments it has sold equipment to. These include Indonesia, Saudi Arabia and Zimbabwe. Groups such as Campaign Against Arms Trade have criticised the company for supplying arms to Israel, which they argue is guilty of human rights abuses. BAE's U.S. subsidiary makes several sub-systems for F-16s, 236 of which have been supplied to the Israel Defense Forces.

BAE (and British Aerospace previously) has long been the subject of allegations of bribery in relation to its business in Saudi Arabia (through the Al Yamamah contracts). An earlier contract, the BAC sale of arms in the 1970s including Lightning fighters, involved "commission" payments of GB£100 million.The company has been accused of maintaining a GB£60 million Saudi slush fund and is the subject of an investigation by the Serious Fraud Office. The UK National Audit Office investigated the contracts and has so far not published its conclusions - the only NAO report ever to be withheld. In July 2006 The Guardian reported that the Comptroller and Auditor General (head of the NAO) had refused requests by the Ministry of Defence police and the Serious Fraud Office to see the report. In response to the reports the Ministry of Defence stated "The report remains sensitive. Disclosure would harm both international relations and the UK's commercial interests."

In September 2005 The Guardian alleged that banking records showed that BAE paid GB£1 million to Augusto Pinochet, the former Chilean dictator.The Guardian has also reported that "clandestine arms deals" have been under investigation in Chile and the UK since 2003 and that British Aerospace and BAE made a number of payments to Pinochet advisers.

BAE has been criticised for its role in disposing of surplus Royal Navy warships. HMS Sheffield was sold to the Chilean Navy in 2003 for GB£27 million, however the government's profit from the sale was GB£3 million after contracts worth GB£24 million were placed with BAE for upgrade and refurbishment of the ship. BAE is alleged to have paid "secret offshore commissions" of over GB£7 million to secure the sale of HMS London and HMS Coventry to the Romanian Navy. BAE received a GB£116 million contract for the refurbishment of the ships.

BAE Systems does not manufacture land mines. While it does not directly manufacture cluster munitions it received a contract for 26,000 155 mm L20 cluster artillery shells in November 2002 with manufacture subcontracted to Israel Military Industries. Armed Forces Minister Adam Ingram explained that BAE's involvement came from the fact that "BAE Systems [was] able to negotiate favourable rates for the shell."

Joint ventures etc.

A BAE–assembled Eurofighter Typhoon T1. BAE is a partner in Eurofighter Jagdflugzeug GmbH, the multinational company that coordinates the design, production and upgrade of the aircraft.
A BAE–assembled Eurofighter Typhoon T1. BAE is a partner in Eurofighter Jagdflugzeug GmbH, the multinational company that coordinates the design, production and upgrade of the aircraft.

BAE's shares in Panavia Aircraft GmbH (37.5%) and Eurofighter Jagdflugzeug GmbH (33%) represent its involvement in the Panavia Tornado and Eurofighter Typhoon projects. BAE is involved in production of the export version of the Saab Gripen and owns 50% of Gripen International KB, the company responsible for marketing of the aircraft. BAE inherited a 35% share in Saab AB from British Aerospace. This was reduced to 20.5% in January 2005.

In 2001 BAE's missile businesses were merged into MBDA in 2001 giving BAE a 37.5% share. Other shareholdings include 25% of SELEX Sensors and Airborne Systems, 50% of Flagship Training Limited and 50% of Fleet Support Limited (a joint venture with VT Group plc).

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