Outlook: Hawk deal leaves BAE still looking for a long-term saviour

Collins Stewart; LogicaCMG
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The Independent Online

BAE Systems has been about to win the contract to supply India's airforce with trainer jets for at least two decades now, so we should perhaps wait for formal confirmation from the company before accepting that the $1.7bn deal has after all these years finally been done.

Yet, after one of the longest waits in defence procurement history, this does indeed seem to the the case, the final clinchers being the growing propensity of young Indian fighter pilots to crash their jets, a lot of give on the price, and the recent decision by Geoff Hoon, the UK Secretary of State for Defence, to overrule the advice of his officials and award an RAF contract for trainer jets to BAE without foreign competition.

By common agreement, the Hawk would have been dead in export markets without the RAF's vote of confidence, so there's one thing at least that Mr Hoon has got right in recent months. Even so, many are going to wonder about the ethics of selling fighter jets to a nation which is constantly threatening to go to war with its neighbour Pakistan. The deal once again raises important questions about Britain's leading role at the centre of the arms trade.

Without abundant export markets, most of what BAE does couldn't possibly justify itself commercially. The cost of new aircraft and weapons development is so astronomic that domestic programmes alone are insufficient to pay for it. As it is, the case for indigenously developed military hardware is becoming increasingly hard to defend.

In nearly all cases it would be more cost effective simply to buy the stuff off the shelf from the Americans, unpalatable and defeatist though this statement might seem. As a job creation programme too, defence spending is an extraordinarily inefficient use of public money. The supposed benefit to Britain's technological base is also much exaggerated. For more than 50 years now, Germany has been without any defence industry to speak of, yet it is streets ahead of Britain in state of the art engineering.

BAE cannot exist on orders from Britain and its former empire alone. Growing parts of the world are for security reasons becoming off limits, while Europe remains as difficult a market for BAE as ever. All of which pushes BAE ever further towards the welcoming arms of the US, the only country in the world with a defence budget big enough to give the company a continued raison d'être. At Boeing, Philip Condit, the chairman, believes that all he has to do is watch and wait.

Collins Stewart

One of the hardest things to understand about the Collins Stewart Tullett débâcle is how someone as apparently media savvy as Terry Smith, the chief executive, came so badly to mishandle it. Whatever the truth or otherwise of the allegations levelled against him and his company, he should have seen the reputational damage they were capable of doing coming a mile off, and acted accordingly.

This is more especially the case as Mr Smith counts himself one of us scribes, a fearless iconoclast whose combative stance when still a lowly investment analyst was an inspiration to all. Some of his best friends are financial journalists, his newspaper columns are a must read, and his book, Accounting for Growth, was a masterpiece in the way it debunked the apparent success of some of Britain's biggest companies. He must have realised that the allegations of a disaffected former Collins Stewart analyst would eventually become public, but he plainly thought the press wouldn't print them. Either that or nobody would take them seriously. Either way, it was naive of him.

Once the press gets hold of allegations like these, it will carry on flogging them until the horse is dead, buried and turned to dust. Yet there was apparently no damage limitation plan in place when the story broke, unless you count the spectacle of an incandescent Mr Smith, which hardly looks like a considered public relations strategy to me. Denials, however strongly worded, only go so far in a business where integrity and reputation is all.

Mr Smith felt he had no option but to sue the Financial Times for libel when it went further than everyone else by regurgitating the detail of James Middleweek's allegations, unsubstantiated though they are. Yet even that just adds to the weight of suspicion, for to sue the City house mag, however much standards there might have slipped, just smacks of desperation. There's no comparison, of course, but it's the sort of thing Robert Maxwell and George Walker used to do to try to shut the press up.

On a general level, many of Mr Middleweek's allegations are only too credible, for everyone believes the ramping of client valuations to be common practice in the City. The big American investment banks have forked out hundreds of millions of dollars in fines for engaging in just the sort of practice alleged by Mr Middleweek, which in itself has given the story a plausibility it wouldn't otherwise possess.

I suggested the other day that it would have been cheaper for Collins Stewart to have paid Mr Middleweek off. That's certainly what happens at some other investment banks confronted by a disaffected employee determined to do his worst, even when the allegations are without foundation. Right and wrong don't come into it. The decision is a commercial one.

That's not Mr Smith's style, for which he should perhaps be congratulated. It should also be pointed out that Collins Stewart is a comparatively small, entrepreneurially led securities house, quite unused to dealing with personnel issues with nuclear potential. Regrets? Mr Smith will certainly have a few over this affair.

LogicaCMG

It's the wrong time of year for such analogies, I know, but the green shoots of economic spring seem suddenly to be showing through all over the place. Yesterday's early crocus pushing its way up through the frozen tundra was LogicaCMG, whose share price surged by nearly a fifth after one of the most upbeat statements we've seen from the technology sector for many a long year.

Martin Read, the chief executive, is a natural optimist, a characteristic which got him into serious trouble during the downturn, when he consistently overestimated the company's prospects and likely revenues. He was consequentially punished with a share price fall much more severe than it should have been for a company which is well managed and financially strong. For a while, the wolves were at his door, though in truth it would have made no sense at all to eject him for failing to live up to promises. If that were to be the penalty, there would barely be a chief executive left standing.

Once bitten, twice shy. This time around Dr Read is careful to qualify his optimism by insisting that the upturn in revenues is all down to the competitive advantage gained from the merger with CMG, rather than in any underlying improvement in the market. He none the less confirms that things seem firmer, with price stability returning and the UK business returning to growth. Even the market for mobile telephony software, which all but disappeared last year, may be reviving. Most significant of all, for the group as a whole, future orders are running 12 per cent ahead of current revenues.

One of Dr Read's stated ambitions is to resecure his place in the FTSE 100. The merger with CMG got him half way there, as that doubled the size of the business, and yesterday's share price surge may have done the rest. If the decision had been taken last night, he'd have been back in already. He'll be hoping the shares hang on to yesterday's gains long enough to carry him through to next week, when the actual decision takes place.

Dr Read's other ambition, to become one of the world's top 10 IT companies by revenue, will have to wait a while. He's still only number 36.

jeremy.warner@independent.co.uk

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