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BAE tries to polish corporate image ahead of Armor deal

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Analysis BAE Systems plc's corporate migration to America may be entering troubled waters.

The UK-based arms giant's latest plan is a £2.1bn acquisition of Armor Group, an American firm which makes Humvees and other vehicles for the US forces. This would be a good buy for BAE.

Protected light vehicles are seen as a Pentagon "sweet spot", with large numbers of troops currently embroiled in bloody counter-insurgency wars. In conflicts like this, heavy tanks and tracked infantry carriers can't carry everything and everybody; so soldiers need lighter, easier-to-maintain vehicles which are still armoured well enough to have a chance against roadside bombs or rocket-propelled grenades.

Even though this kind of fighting is much more common than full-on panzer warfare, armies prefer not to think about it until they have to and the US forces began the Iraqi and Afghan wars without much of this light-ish protected mobility. There will be profits to be made as they equip themselves for modern warfare, and more in keeping them equipped.

The money to buy Armor Group is there: BAE made a tidy sum last year by selling off its stake in Airbus (and with it the last of the serious British civil-aircraft manufacturing industry, whose long-term survival must now be in doubt). The Airbus stake didn't fetch as much as BAE was hoping, but a recent £750m issue of shares was sold without difficulty to make up the difference. There may have been a feeling in the City that BAE was a good buy now that it has managed to give the Serious Fraud Office the slip; the long-running investigation into alleged BAE backhanders paid to Saudi royals was deep-sixed with the approval of the outgoing Blair administration last year. The decision was given a sprinkling of magic national-security pixie dust, but this has failed to really make it fly away.

Many observers have speculated that the dropping of the probe had more to do with securing a Saudi order for 72 Eurofighters than with the desert princes' help in tackling jihadi terrorism. Others have noted that BAE - in common with other large UK firms like BP - is believed to have a dedicated liaison channel with the Secret Intelligence Service* (SIS, the body often known as MI6). It has been suggested that an ordinary company without such access might have a bit more difficulty in getting fraud cases dropped on "national security" grounds.

And so far, the issue of the dropped corruption probe is failing to go away. A lot of people, perhaps, are willing to live with ethically questionable moves by businessmen dealing with bent foreign despots. However, when it arguably becomes more a case of the foreign despots and businessmen allying to manipulate British politicians and officials, many would feel that things have gone too far. It might well take more than a glib assurance from MI6 that the world has been kept safer as a result to make the average UK citizen happy about all this - and anyway, it seems that MI6 may be unwilling to offer such an assurance in this case.

BAE could normally afford to wait all this out, and conceivably the UK government could avoid or shrug off the mooted OECD corruption case that may follow. After all, there aren't many industrialised countries who can really claim a clean sheet on this issue. Similarly, the remaining SFO open files on BAE bribery in Eastern Europe and Africa are a battle for another day.

It has also been speculated that the UK government may be expecting future benefits from the Saudi Eurofighter deal - other than continuing employment for thousands of workers at the Warton fast-jet plant, and some notional intel benefit from Riyadh. The UK is currently committed to buying fully 232 Eurofighters itself, and it is well known that the RAF only wants an operational fleet of 140-odd, perhaps with a few spares.

It could be that, in return for dropping the SFO probe, BAE will be willing to accept that the UK can effectively offload its surplus to the Saudis. Of course, under a straight interpretation of the original contract, the RAF must take all 232 and the 72 for the Saudis are extra business for BAE - never mind if this means a big pile of horrifyingly expensive British jets which will never fly.

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