Original URL: http://www.theregister.co.uk/2007/05/14/bae_media_push_going_well/

BAE tries to polish corporate image ahead of Armor deal

No matter how they scrub they'll never be clean

By Lewis Page

Posted in Data Centre, 14th May 2007 14:23 GMT

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.

But sources close to BAE have been hinting privately that a let-off for the UK taxpayers could be in the offing. Of course, this is unsubstantiated thus far; and it could be no more than an attempt to prevent the UK from starting serious talks with its European partners about cancelling Tranche 3 of the Eurofighter programme, which would be possible if the nations were unanimous.

Regardless of what secret deals BAE may have done with Whitehall and the Saudis, it can't ignore the US government. America has already expressed its displeasure over the SFO probe being dropped. There are some on Capitol Hill who don't want the Saudis to acquire a new generation of cutting-edge fighter jets in the Eurofighter deal; there are others who would prefer the Arabs buy American planes. Both factions will now be angry with BAE and the UK government.

This could be serious for the Armor Group deal, which will need US government approval to proceed. To date, BAE acquisitions in America have typically gone through on the nod and the company now does much of its business in the States.

This close relationship with the US arms market has many benefits. Not only does BAE make a lot of money right off, it can sometimes re-sell expertise developed at the American taxpayer's expense overseas - and not just to the UK either.

One example is last week's deal in which BAE will teach the Spanish submarine industry how to make modern pressure hulls, a trick which BAE itself only recently learned from America. In future, BAE (again with British government help) hopes to acquire classified American technologies from the F-35 Joint Strike Fighter. A US company would probably never get federal clearance to export Stealth tech, for example, to places like Saudi Arabia or Indonesia; but looking at the track record, that isn't something one can necessarily say of BAE and the British government.

Washington protectionists and arms-export critics alike may be starting to doubt that BAE is the sort of company which should be invited further into the American military-industrial complex. They might carry the day no matter how much cash BAE may be able to raise by selling UK factories which were gifts from UK taxpayers, and which have since been fattened up largely by those same taxpayers.

Still, this is a world where BAE has been able to get both the Observer and the BBC to describe the imminent launch of HMS Astute as "two months early" and "on time" - rather than several years late, which is the reality.

BAE has also earned praise for "the fact that a company can make a return on such a complicated programme," and lauded for its brilliance in turning the disastrous Astute project around. Some would argue that making a return on a complicated project isn't too hard if you're allowed to almost double the so-called "fixed" price as you go along, and if you're able to call in consultants to provide highly-classified American knowledge to boot. Such commentators aren't writing for the UK business press, however.

If BAE is able to spin the US media as effectively as it has done the British, there's no telling what deals it might be able to do across the pond. A mere third of BAE's people are now employed in the UK, and this number has fallen steadily over time. Brits working for BAE should probably beware of being sold off in favour of Americans who cost no more to hire and whose politicians control a defence budget at least 10 times as big. The Armor Group deal should certainly not be written off yet. ®

*According to Richard Tomlinson, the exiled former SIS officer.

Lewis Page is a former Royal Navy diving officer and commando. His splendid book, Lions, Donkeys and Dinosaurs, which documents the British forces' long and damaging relationship with BAE, is out now in paperback. Even if you don't like it, it's printed on lovely absorbent, flammable paper and has dozens of uses around the home.