James Moore: If BAE and EADS gets a 'non', why not a true Brit takeover by Rolls-Royce?

Outlook The start of a new week has brought no respite for BAE Systems' chief executive, Ian King, with a fresh set of laser-guided advanced precision kills weaponsTM fired at his proposed merger with the Franco-German EADS.

It's hardly a great surprise that a former First Sea Lord would find unpalatable the idea of handing Britain's defence champion to the bally French. Of more concern to Mr King will be the reaction of his own shareholders. Standard Life expressed its scepticism publicly yesterday. Plenty more are saying the same things in private.

If the shareholders roll their tanks on to Mr King's lawn and have the gumption to keep them there, it would solve a nasty dilemma for the Government, which quite likes having golden shares as a security blanket but has proved strangely averse to using them when it counts.

Happily for the ministers involved, when it comes to ill-conceived mergers, institutional investors have proved increasingly willing to say "non" when it counts.

Which leaves the question of where next for BAE? Rivals in the US are already making hay with the news: the damage some fear could be wrought on its business with the Pentagon if this merger goes through may have already been done.

BAE's rivals will be banging home the same message every time they bid against it: "These guys aren't to be trusted."

A combination with one of those rivals also looks unlikely. The Pentagon has (sensibly) made clear that it does not want its five main contractors (of which BAE is one, for now) reduced to four.

Which leaves BAE in a bit of a bind. If the reports are true, it considered approaching Rolls-Royce about a merger before the possibility of the current deal with EADS reared its ugly head. The idea was rejected because it feared it would be laughed out of court.

That's probably true. Rolls-Royce is everything BAE is not. Well-run, reliable and, if not in a strategic sweet spot, then at least in a happy place. Which leads to the question, instead of a merger with BAE, what about a takeover of it by Rolls-Royce, playing the role of white knight?

There would be some worries among investors about the consequences for the latter's highly rated shares. But if Rolls' bosses are as good as everyone thinks they are, then those concerns should prove transitory.

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