BAE Systems Suffers Due To U.S. Acquisition

(MoneyWatch)  It is not uncommon for larger defense contractors to expand their market reach or product line through the simple acquisition of a smaller company. Many of these are started by entrepreneurs who reach a point where they want to cash in and move on to another project or the cash offered is so valuable that even a public company accepts the Merger and Acquisition (M&A). Another factor that has driven a great deal of M&A in the last ten years in the U.S. defense industry is by buying an American company the large European defense businesses makes it easier for them to work with the Pentagon.

The U.S. has strict rules about who can work on contracts and the sharing of technical data overseas. Acquiring a U.S. company gives a foriegn company if they set it up correctly a separate entity employing American citizens and not doing business overseas. BAE Systems, EADS and Finmeccanica have all done this. Even smaller companies such as QinetiQ and VT Group did so as well.

Sometimes of course these deals do not work out as the planned business does not arise or their issues with the company purchased that may not have been apparent when the deal went through. BAE Systems announced that due to fact they did not win parts of two major U.S. defense vehicle contracts their acquisition of Armor Holdings two years ago is causing financial issues.

The first contract was the new MRAP-ATV for lighter vehicles for use in Afghanistan. That contract went to Oshkosh Defense. Unfortunately for Armor Holdings and BAE Systems they also did not win the new truck contract for the U.S. Army. Armor Holdings had been making these Family of Medium Tactical Vehicles (FMTV) for several years. That contract also went to Oshkosh as they came in with a better price.

BAE Systems has protested that award but if they protest is not sustained the former Armor Holdings plant in Texas will close in two years. The FMTV contract is worth almost four billion dollars to the ultimate winner for over 10,000 vehicles and trailers. The protest is based on the fact that Oshkosh as not having built the system previously is a much higher risk to meet scheduel and performance and that should outweigh the cost benefit.

BAE says now that they must write down much of the $3.5 billion odd goodwill related to the purchase of the U.S. company. The British company had to pay a premium due to competition from General Dynamics and other large U.S. companies. In 2008 the company reported total sales of over $25 billion so this represents about twelve percent of that amount. The issue does illustrate that not all plans go perfectly.

If the protest is denied and U.S. purchases of equipment go down as is expected as forces in Iraq are drawn down and pressure is exerted on the overall defense budget then BAE Systems could suffer in the U.S. Not only does the company face these issues but the bribery scandal in England may draw their U.S. operations in which also may have an affect on their ability to operate in the U.S. or lead to fines.

BAE Systems felt that buying Armor Holdings would place them in good position to dominate U.S. military vehicles. They do continue their work with M2 Bradley fighting vehicles as well as work on artillery pieces and vehicles, but the loss of the MRAP and FMTV work must hurt. The U.S. Army and Marine Corps must replace or repair a great deal of tactical and logistics vehicles damaged or destroyed in Iraq and this would have been a significant business for BAE Systems.