Congress keeping mum on defense merger

U.S. officials have been keeping quiet in the weeks since news broke of a potential $45 billion merger between BAE Systems and EADS that would create the world’s largest defense and aerospace company.

It’s a stark contrast from government officials in France, Germany and the United Kingdom, which have been engaged in a public debate about the merger as the companies hash out the details ahead of an Oct. 10 British takeover deadline.

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While much of the action between the two European companies is happening on the other side of the Atlantic, the talks are occurring with a keen eye cast toward the United States and its defense market.

U.S. officials at the Justice Department and Pentagon will have to sign off on the merger, and Congress will have an opportunity to weigh in as well.

BAE, which has the larger presence in the U.S., is already gearing up for outreach in Washington. The company has hired lobbyists from two big D.C. firms and held meetings with DOD officials and congressional offices.

Little has been said publicly about the deal on Capitol Hill. The chairmen and ranking members of the four main defense committees declined requests from The Hill to discuss the merger. Some said they were waiting for more details.

“The chairman is watching the potential merger with interest,” Claude Chafin, a spokesman for House Armed Services Committee Chairman Buck McKeon (R-Calif.), said in an email. “His expectation is that the merger and well-established process that reviews the implications to national security will follow regular order.”

While the merger is between two European companies that don’t overlap much, the deal has the potential to shake up the U.S. defense and aerospace markets, representing the first step in what some have warned is a new round of consolidation for the industry.

There are numerous issues facing the merger in the United States, but the most immediate one is BAE’s special security arrangement (SSA) with the U.S. government, which gives the company access to sensitive DOD contracts by fencing off BAE’s North American entity from its U.K. parent.

BAE’s agreement gives it access to projects that other European contractors, including EADS, do not have.

France has a direct stake in EADS, and Germany has an indirect stake. German officials have talked about acquiring a direct share, but there are concerns about the level of operational control European governments would have in the merged company, even if the North American branch were fenced off.

One defense industry insider said that if BAE’s security arrangement were weakened, it would force the company to call off the deal.

“I don’t think they would do the merger if that was the case,” the official said. “The SSA is so important for them to have.”

Loren Thompson, a defense analyst at the Lexington Institute who advises both BAE and some of its competitors, predicted that industry competitors would try to leverage security concerns to sabotage the deal.

“It is a fairly easy thing to create a structure in the new enterprise that prevents the leakage of any sensitive information, but critics of the deal will claim otherwise,” Thompson said.

Boeing, which competes with EADS subsidiary Airbus in the commercial aviation market, is seen as the competitor with the most at stake. Boeing’s chief defense official said last month that the merger needed to be “scrutinized” for national-security and industrial questions.

“The reason Boeing is concerned is that it doesn’t want its biggest competitor to have a major political presence in its home market,” Thompson said.

Industry officials said Congress might make the most noise about potential job losses. While the merger might not cause direct layoffs in the United States, the officials said, a combined BAE-EADS would be better positioned to compete around the globe against defense giants Lockheed Martin and Boeing.

Companies like Lockheed Martin have said they want to increase foreign sales to help continue their growth amid a declining U.S. defense market.

The EADS-BAE merger talks have also pointed up fresh questions about whether a new wave of consolidation is coming to the defense industry, which hasn’t happened since the 1990s. 

“I think it does signal the start of something,” said Mackenzie Eaglen, a defense analyst at the American Enterprise Institute. “A lot of analysts have assumed there’s pent-up M&A demand in the U.S. defense sector.”

Russell Solomon, a senior vice president at Moody’s, wrote last month that if the EADS-BAE merger does not occur, other companies might try to acquire BAE instead.

“We expect that the merger talks have now triggered at least consideration of a new round of business realignments within the global aerospace and defense industry, the immediate effects of which could include counteroffers for BAE from other large defense contractors, further consolidation among remaining defense contractors, asset trades among industry participants or, if the transaction moves forward, regulatory-mandated asset dispositions,” Solomon wrote.

Of course, the U.S. role in the merger will be moot if the French, German and British governments don’t sign off on it. Their decision remains up in the air as European officials debate the ratio of ownership for BAE and EADS in the combined company and the role that the governments will play.

Thompson said he expects more talk in the U.S. about the deal after Election Day.

“The U.S. political system is totally distracted by the election,” Thompson said. “I don’t expect anybody in Congress to say anything until after Nov. 6.”