The market reacted positively to news that BAE Systems has appointed advisers to help with the potential £1.3bn sell-off of its platforms solutions business in the US, which comprises flight control systems for aircraft and power systems for vehicles, sending the shares 1.6 per cent higher. BAE was tight-lipped about the reasons for the fund-raising, but the build up of an acquisition war chest in a rapidly consolidating US defence market is fast becoming a priority for big contractors.
The division that BAE wants to sell is a sub-grouping of its electronics, intelligence and support division, which had sales of $8.8bn (£5.71bn) in 2009, and represents part of the group's 'cold war' legacy. New defence doctrine emphasises areas such as cyber warfare, less complex mine-proof vehicles to combat insurgencies and unmanned drones and spy planes. In fact, the whole apparatus supporting the ability to wage inter-state warfare is in gradual decline under the pressure of budget cuts, with state security increasingly dependent on nuclear deterrence.
Whether it is wise for BAE to invest more money in the US, viewed by many as a fading imperial power, is open to debate. But the fact is that the basic $533bn (£334bn) US defence budget dwarfs anything any other country is prepared to spend, and BAE is the sixth-largest supplier to the Department of Defense. The market seems set for consolidation, with rumours that Boeing and Northrop-Grumman could be about to negotiate a merger to rival the McDonnell Douglas/Boeing tie-up in 1997.
The reason for all this activity is the growing realisation that the US defence 'pie' is about to serve far less generous portions unless the country's structural deficit is addressed. The recent defence industry review by accountants Grant Thornton showed that budget pressure will constrain the annual rise in defence spending to about 1 per cent per year in real terms to $743bn by 2015, compared with 6 per cent in each of the past five years; defence spending will decline from 3.2 per cent of GDP to 2.6 per cent, the consultant estimates.
