Business View: Limping down the runway, a BAE-Boeing merger may just get off the ground

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The Independent Online

After BAE Systems revealed its latest spat with the Government, over the long-disputed contract that it is sharing with its French rival Thales to build a couple of new aircraft carriers, a cartoon appeared in another national newspaper. It showed what appeared to be a scaled-down model of the ships - except there was a sign on it saying "actual size".

The BAE vs MoD fights are descending into farce. It seems that no contract agreed between these two organisations can be completed on schedule, to the original budget and to the desired specifications. Indeed, in many cases, none of these three targets have been met. It would be funny if it wasn't us paying for this shambles through our taxes.

It is not clear whose fault this is. The Government is fundamentally bad at letting contracts - something it knows but can't seem to sort out. Attempts to use the PFI to deal with this have only partially worked. The MoD may be a classic example of the client that changes its mind in mid-contract, but in the case of the aircraft carriers, the MoD hadn't even had time to inspect the first drafts before BAE was upping the ante.

BAE, though, is clearly in a muddle. On one hand it has a poor relationship with its best customer; on the other, it is trawling America trying to find a merger partner so it can dive headlong into the pork barrel of US procurement (it says the reason is access to technology, but that is only part of the story). In the midst of all this, it has a bad track record when it comes to delivering sustainable profits and a tetchy relationship with the City.

However, BAE has discovered that, as with its MoD contracts, execution is a problem. None of the big US defence contractors seem to want to merge with it.

But the last week may have changed all that. Boeing's woes have worsened, with it all but closing its commercial satellite business, taking a $1.1bn charge in the process, and cutting another 5,000 jobs at its already heavily pruned commercial aircraft business (which now employs two thirds as many people as it did two years ago). This comes on top of investigations into its business practices, after two cases in which employees stole documents from rivals to win bids. The result was a public apology for these misdemeanours by Boeing and criminal charges against the people involved, leading to questions from Congress about how the group was awarded some of its defence contracts.

BAE sees Boeing as an ideal partner because there is little overlap in the businesses, but it is worried about its size and its commercial aircraft side conflicting with Airbus, where BAE has a fifth of the shares. But things are getting so bad at Boeing that it may be prepared to ditch the commercial business, floating it off or selling it to a financial buyer, in order to strike a deal.

BAE would no doubt jump at the chance of a merger. But would it merely be a case of two defence contractors with broken arms clinging together in the hope they could make the combined structure fly?

Will Lloyds divorce the Widow?

The next couple of weeks will tell a tale of two dividends. The first, from Legal & General, will be at least maintained. The second, from Lloyds TSB, should be cut, and almost certainly will be.

There are more similarities between these companies than the dividend issue. Both play the bankassurance game. Lloyds TSB bought Scottish Widows so that you could be sold a pension when you came in to cash a cheque. Legal & General was going to merge with NatWest to do the same thing, before a takeover battle delivered NatWest into the hands of Royal Bank of Scotland and ruined that gig. L&G has since linked with Barclays, which sells its products, a deal that appears to help both sides. To customers there is not a lot of difference between Barclays staff selling L&G products and Lloyds TSB folk flogging Scottish Widows.

The trouble is that Widows has been a drain on Lloyds TSB, requiring extra capital as the market has fallen, and further payments to customers for the past mis-selling of pensions and endowments. Some £250m more will have to be provided for in the coming half-year figures, which is why Lloyds TSB will almost certainly have to cut its dividend. And why Eric Daniels, Lloyds TSB's new-broom chief executive, is wondering out loud whether Widows has a long-term future under the bank's ownership.

j.nisse@independent.co.uk

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