BAE Systems Looks to Sell Chunk of U.S. Subsidiary

by: Matthew Potter
September 13, 2010

Category: Acquisitions, BAE Systems, Boeing, Business Line, Companies, Congress, Contract Awards, Countries, Department of Defense, Events, Federal Budget Process, Industry Analysis, northrop grumman, Northrop Grumman Corp., Oshkosh Truck Corp, production program, Services, U.S. Army, U.S. Marine Corps | RSS 2.0

Since 9/11 and with the engagements in Iraq and Afghanistan the U.S. defense budgets has increased dramatically. Due to this increase in spending as well as the reduction in the domestic industrial base since the end of the Cold War the large European defense contractors entered the U.S. market. Now that those commitments are winding down and concerns about the size of the deficit and government spending in general may cause the defense budget to shrink some are rethinking their commitment to this market.

Both BAE Systems (BAE:LSE) and EADS (EADS:P) entered the U.S. market by setting up subsidiaries and acquiring American defense contractors. These moves were seen as a simple way around the security and technology transfer requirements. BAE especially established itself as a maker and support contractor for military vehicles heavily used by the Army and Marine Corps. Now there are reports that BAE will look to sell part of its U.S. operations.

A few years ago BAE purchased Armor Holdings as a way to expand their vehicle and armor production. BAE has made a great deal of money making Mine Resistant Ambush Protected (MRAP) vehicles for the American military as well as armor plate used by other companies. Unfortunately Armor Holdings biggest contract was to make the FMTV truck and that contract was lost to Oshkosh (OSK) in 2008. BAE is now missing a great deal of the revenue that Armor Holdings move promised.

Supposedly BAE will look to sell its platform solutions group. This business group provides products that is “serving the defence and aerospace communities with capabilities and products that improve operational safety and enhance mission effectiveness.”

Certainly there has been much discussion over the last few months as it becomes clear the defense budget will take some hits that there will be consolidation and mergers within the defense industry. By selling this group BAE raises capital to buy other companies that will help them focus on certain core capabilities or expand into new markets. Other companies may be willing to buy the group for the same reason.

If this does happen it will be a sure sign that many see little or no future expansion in the U.S. defense industry and their might be another round of consolidation as happened in the 1990’s. There are already rumors of Boeing (BA) merging with Northrop Grumman (NOC) for example.

These kind of signs and rumors indicate it might be a rough few years for the defense industry and their stocks as this is all sorted out.

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