* Limited overlap among companies' work in U.S.
* Both companies have special security agreements
* Pentagon will review deal if, when it proposed
By Andrea Shalal-Esa
WASHINGTON, Sept 12 A merger between Europe's
EADS and Britain's BAE Systems would likely
get the green light from U.S. authorities, and could be the
catalyst for further deals in the Western defense industry.
Pentagon and U.S. antitrust officials are unlikely to block
the deal, multiple sources close to the matter said on
Wednesday, though a deal would require some complex changes of
separate security arrangements that both companies have to
prevent their foreign-based parent companies from influencing
their work on sensitive U.S. government programs.
Merging the two European companies is not expected to raise
significant antitrust concerns in the U.S., given the modest
amount of U.S. military work done by EADS, said the sources, who
were not authorized to speak publicly.
They said the two companies had little overlapping work in
the U.S. market, and cited BAE's long-established and trusted
role on some of the most sensitive U.S. military and
The U.S. Defense Department on Wednesday said the companies
haven't submitted a detailed plan, though people familiar with
the matter said the companies have been holding preliminary
conversations with U.S. officials.
"We have not been formally notified about a merger, but we
will review such a merger if and when it is proposed," said
Pentagon spokeswoman Lieutenant Colonel Elizabeth Robbins.
EADS, the parent of Airbus, and BAE, maker of submarines and
fighter jets, on Wednesday said they were in advanced talks to
create a combined group worth $48 billion.
The merged group would overtake Boeing Co as the
world's biggest aerospace and defense company in sales
The announcement comes at a time when U.S. and European
weapons makers are girding for sustained declines in U.S.
military orders after a decade of sharp gains linked to the wars
in Iraq and Afghanistan. Many executives and U.S. government
officials expect a fresh wave of consolidation, mainly among
small to medium-sized companies, although the head of BAE's
business in the United States earlier this month said top-tier
companies could be affected too.
BAE has nearly 40,000 employees in 42 states, including many
with security clearances, while EADS has just 3,000 workers in
15 states. BAE generated $14.4 billion in U.S. revenues last
year, while EADS' sales generated sales of around $1.4 billion.
EADS builds light utility helicopters for the U.S. Army, but
has not achieved any other significant breakthrough orders,
especially after losing out to Boeing on a huge order to build
179 refueling planes for the U.S. Air Force last year.
A top Pentagon official told Reuters last week that further
big budget cuts could make the U.S. Defense Department rethink
its current wariness about additional mergers among top-tier
companies in the weapons industry.
Brett Lambert, deputy assistant secretary of defense for
manufacturing and industrial base policy, said that current U.S.
policy did not forbid mergers among big weapons makers, noting
that and any proposals -- even at the top tier -- would be
examined on a case-by-case basis.
Linda Hudson, who heads BAE's U.S. business, told Reuters
earlier this month that high-level deals could still be on the
horizon, despite the Pentagon's reservations, depending on how
deep the coming budget cuts turn out to be. "If budgets are cut
enough, there will be consolidation at all levels," Hudson said
at the time.
BOEING STILL DIGESTING NEWS
Boeing's Chief Executive, Jim McNerney, speaking at the
Council on Foreign Relations in Washington on Wednesday, said he
was still digesting the news, but did not believe the increased
heft of a combined European company would threaten his.
"I don't see this as something that is going to threaten us
fundamentally," McNerney said when asked about it after a speech
at Council on Foreign Relations in Washington.
"It does reflect a global consolidation that is beginning to
happen," he said, adding that an EADS-BAE merger would create an
entity with more balanced commercial and military operations, a
model that Boeing has followed for some time.
McNerney declined to comment further, saying he had not
studied the issue. Executives at Lockheed declined comment.
A BAE spokesman in the U.S. said both companies operated
under special security agreements that allowed them to work on
sensitive U.S. government contracts.
"BAE Systems Inc views its security agreement as an
embodiment of the trust that the U.S. government has in its
security and compliance systems to operate highly classified and
sensitive programs," said the spokesman. "Under the contemplated
transaction, it is our objective that the security framework
will not change substantively."
EADS, which has a far smaller footprint, would likely be
folded into the well-established BAE Systems agreement, said one
source familiar with the companies' thinking.
One U.S. antitrust expert said the deal was unlikely to
encounter obstacles as part of a U.S. Justice Department review.
"I can't see anything that's going to be problematic," said
Darren Bush, a veteran of the Justice Department who teaches law
at the University of Houston Law Center. "All the U.S. based
companies will grouse but from an antitrust perspective I'm not
sure what they can do about it."
William O'Neil, a former Defense Department acquisition
executive who has also worked for Lockheed Martin, said Pentagon
officials worried about losing competition for big orders, but
could find it difficult to reject the deal.
"It's questionable whether they could find legal basis to
block the BAE-EADS union, especially since neither is a major
prime contractor and the overlap in their U.S. operations is
limited," said O'Neil, who now consults for the Institute for
Combined, BAE and EADS would have sales of about 72 billion
euros ($93 billion), based on 2011 numbers, and would have
220,000 employees worldwide. In comparison Boeing has sales last
year of $68.7 billion, while Lockheed Martin has sales
of $46.5 billion, according to Thomson Reuters data.