FIRST LINE OF DEFENCE: BAe faced a barrage of international criticism over its plans to buy Marconi

There are mergers ... and then there are mergers in the defence industry.

There are mergers ... and then there are mergers in the defence

industry.



When two arms giants come together, the political dimension is almost as

important as the essential investor relations. Never has this been more

apparent than in the aftermath of the announcement on 19 January that

British Aerospace was intending to buy the Marconi defence arm of GEC

for almost pounds 8 billion.



BAe chairman Dick Evans and GEC managing director Lord Simpson called on

Tony Blair at Downing Street the evening before the announcement was

made. This was not a matter for civil servants and junior corporate

functionaries.



In fact, the deal is so sensitive still that though many leading players

in the PR for the merger were prepared to talk to PR Week, none would

step out from behind an armour-plated shield of anonymity.



A merger in the sector came as no surprise to anybody. Not only had GEC

made it plain early in December that it was looking to offload its

Marconi business, but there has also been a consensus growing among

European governments and defence businesses that consolidation would be

desirable.



Such deals have already taken place in the US, where giants such as

Boeing and Lockheed Martin have swallowed up smaller players. The US now

has about twice the defence budget of the EU, but only half as many

major players.



To compete head-to-head with these US giants, Europe needs bigger

defence companies, runs the argument. And there is a strong feeling that

a merger of companies from different European nations would be

beneficial in terms of closer European integration.



When it became clear that BAe was to combine with a UK rival rather than

a partner in Germany or France, the responses verged on the hostile.

French-owned Thomson-CSF denounced the move as a ’purely national

merger’ and fired a salvo that ’the creation of a national block fits

with difficulty into the picture of European restructuring’. Germany’s

DASA attacked the deal as making balanced European horizontal mergers

’impossible’ and creating an ’obstacle to European integration’.



A senior German defence official, surprised by the BAe Marconi deal,

told the Financial Times: ’I’m still waiting for him (John Weston, BAe

chief executive) to explain.’



Aggravating the situation further, some UK newspapers reported that Tony

Blair was also critical of BAe’s plans. The Daily Telegraph, for

instance, ran a piece the day after the announcement headlined ’Backlash

Over BAe-GEC Deal’, which claimed the Prime Minister would personally

have preferred a cross-border solution.



But BAe has used PR throughout this onslaught to drive home the

fundamental message that it still favours the idea of integration. ’Our

belief has always been that this is the first step towards further

consolidation and it should always be seen as that,’ says a

closely-involved source.



The majority of BAe’s communications work was carried out in-house, with

a six-strong team reporting to corporate communications director,

Locksley Ryan. In addition, retained financial specialist Cardew and Co

provided strategic advice. For GEC, much of the communications was

handled by Brunswick, whose director, James Bradley, headed a team which

at its peak swelled to about eight.



Co-ordination of the announcement itself was a logistical exercise on a

grand scale. The day began with an analysts’ briefing and the release of

a comprehensive press statement. Heads of the operating divisions at BAe

and Marconi had been briefed in advance. They supplied the 100,000-odd

staff who will make up the combined entity with guidance notes and

question-and-answer sheets so they would get their employer’s view on

the transaction rather than receiving information through a media

filter.



A key BAe source says that discussions with other European defence

giants will continue. ’We think that once the immediate response has

died down everyone will get back together,’ he said.



But the feeling persists that the Marconi deal may have put such a union

in jeopardy. ’BAe remains one of the chief advocates for creating a

pan-European company,’ claims one defence correspondent. ’The problem

Europeans have is squaring what BAe says with what it has done.’



That is the paradox with which BAe’s communications team has

wrestled.



They have sedulously pointed out the rationale for the merger, saying it

need not preclude later mergers with other European defence

companies.



Marconi was, after all, in the market for a buyer. Thomson-CSF offered

pounds 6 billion and was furious to lose out. But US companies such as

Lockheed Martin had also shown an interest. BAe argues that had Marconi

gone to the Americans, it would have severely impeded the integration

process.



In an attempt to forestall the deal being further construed as insular,

BAe has emphasised the international credentials of both parties. ’This

is the coming together of two important European companies,’ says an

insider.



’People have tried to label this as UK/UK, which is misleading. The

combined group is a global one, with businesses outside the UK in Italy,

France, the US and Australia.’



So did BAe botch the communications task? Or was it simply that carping

was inevitable given the merger’s nature? Both BAe and GEC share prices

fell heavily following the announcement, but at the time of writing,

both have shown signs of recovery. The deal, it seems, appears more

favourable the more the City considers the facts - which is what the

communications team had expected all along.



The acid test for the PR effectiveness will be where the share prices

sit immediately before the merger is completed, probably late in the

summer, and how the merged entity fares financially thereafter. To date,

from a communications standpoint, it seems that all that could be done

has been done.



Profile, p32.



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