EADS-BAE merger could be hostage to U.S. politics

Thu Oct 4, 2012 12:44pm EDT
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By Andrea Shalal-Esa and Rhys Jones

WASHINGTON/LONDON (Reuters) - To win approval for their planned $45 billion merger, EADS and BAE systems must persuade Washington to let a pan-European behemoth control some of the most sensitive U.S. defense contracts, without triggering a political backlash.

Defense industry experts say it should not be difficult for Washington to protect its security interests in allowing the deal to go ahead, but the politics could become complicated if Boeing and other competitors lobby against the deal.

"The security issue can be dealt with if the deal is structured properly," said Loren Thompson, chief operating officer of the Virginia-based Lexington Institute think tank.

"The only way this deal can be blocked in the U.S. is if opponents demagogue the issues of security."

The merger must first be cleared by European officials, and the companies and shareholders must agree terms, but U.S. approval would eventually be necessary as well.

BAE is British in origin, but increasingly it has become a trans-Atlantic firm, easily the biggest foreign company in the U.S. defense sector. The U.S. military is its biggest customer and accounts for nearly half of its global revenue.

Its U.S. defense operations are precisely what would make it such an attractive partner for EADS, the Franco-German maker of Airbus civilian jetliners.

Under a complicated Special Security Arrangement (SSA) with the U.S. government, BAE's U.S. defense businesses are kept under separate management and run by Americans, allowing it to bid for and work on contracts involving top secret technology.   Continued...

BAE Systems employees walk together at Roysth naval yard in Rosyth, Scotland October 2, 2012. REUTERS/David Moir