Business View: The BAE rockers need to give up fighting the MoD

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The Independent Online

Down in Farnborough, BAE Systems needs a new mantra. Harold Macmillan's famous line "jaw-jaw is better than war-war" might be a good idea. The defence giant makes its money out of conflict or at least the threat of conflict, but it is never a good idea to go to war with your main customer.

Down in Farnborough, BAE Systems needs a new mantra. Harold Macmillan's famous line "jaw-jaw is better than war-war" might be a good idea. The defence giant makes its money out of conflict or at least the threat of conflict, but it is never a good idea to go to war with your main customer.

Last week's leak that BAE might sell its shipbuilding business was a classic two- fingered salute to the Ministry of Defence. All through 2002 and the early part of last year, BAE's twin leaders, its outgoing chairman, Sir Richard Evans, and chief executive, Mike Turner, were lobbying the MoD to give them the contract to build two new aircraft carriers. The MoD refused, splitting the contract between BAE and French group Thales.

BAE still got a decent share of the £3bn worth of orders. But somehow it neglected to mention to the MoD that it might sell the shipyards which will carry out much of this work. The irony is, as we point out on the front page, it probably can't sell these shipyards anyway. And the company probably knew this when it leaked the story. It was heavy handed at best, cack handed at worst.

A couple of years ago, Mr Turner went on a charm offensive. As part of this, he bought me an agreeable breakfast in the City. The conversation was off the record, but even if it hadn't been, most of it was unprintable. It wasn't quite Ron Atkinson, but it wasn't exactly diplomatic language either. The message he wanted to get across, though, was that BAE was shortly to tie up a merger with a US rival, so giving it a better chance of scooping up the bounty that flows from Washington's giant defence budget.

Since then, it has spoken to Boeing and General Dynamics, made eyes at Lockheed Martin and Raytheon, and even tipped its hat at United Technologies. None of them has been tempted.

BAE was suggesting last week that the sale of its shipyards might help kickstart merger discussions with a US rival, as the yards were putting the Americans off.

But I don't think that is deterring the Yanks so much as BAE's overdependence on just two customers: the Saudi Arabian government and the MoD. The multi-billion-pound Al Yamamah "oil-for weapons" deal struck in the 1980s kept BAE afloat when it hit turbulence a decade or so ago. But now it is starting to run down. BAE needs to charm the Saudis if it is to keep up its sales to the oil-rich nation.

And it needs to charm the MoD too. It seems to think that as the UK's largest defence firm, it has a God-given right to the lion's share of any business. Up until now, whenever the MoD has objected to this, the Department of Trade and Industry has come in to bat for BAE. But even its patience must be wearing thin.

If BAE did merge with a US company, the logic is that it would get to the front of the queue for both US and UK business. But what new chairman Dick Olver should consider if he chooses to stick to the transatlantic merger strategy is that, as most of the American firms are much larger than BAE, the new company would hardly be British. So what little USP it has would disappear.

Another famous Macmillan quote was: "You've never had it so good." BAE may think it gets a hard deal from the MoD. But it could be a lot worse.

Wash your mouth out

Next time you brush your teeth, think of the ring of confidence of Reuben Mark. The chief of Colgate-Palmolive celebrated 20 years at the helm of the home products maker by picking up a pay packet of $148m (£83m). That's a big squeeze out of a lot of toothpaste tubes.

Mr Mark was the highest- paid US executive, according to a survey published tomorrow by Forbes Global. He received twice as much as George David at United Technologies or Richard Fuld at Lehman Brothers. His pay was also 27 times the remuneration of Lord Browne of Manningley, the BP boss and Europe's highest-paid public company executive.

Does this survey fuel the argument that Britain's bosses, far from being fat cats, are woefully underpaid? Or does it really say that the rewards for the top flight of US business remain frighteningly out of line with reality and are storing up trouble for the future?

j.nisse@independent.co.uk

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