BAE bosses struggle to survive collapse of EADS deal

Dick Olver and Ian King's jobs are on the line following death of merger plan

The chairman and chief executive of BAE Systems were fighting to keep their jobs last night after the £30bn merger with EADS they had sold heavily to shareholders collapsed under the weight of political infighting.

Dick Olver and Ian King pledged it would be "business as usual" for BAE, Britain's largest manufacturer, even though City experts said they would have to fashion a new strategy or face falling into the hands of another foreign predator.

"Our business remains strong and financially robust," said Mr King, adding: "We never moved away from our Plan A... We have an excellent Plan A."

The tie-up with Airbus-maker EADS, which would have made BAE a 40 per cent junior partner in the enlarged business and ceded its headquarters to the Continent, foundered after opposition from the German government. Messrs King and Olver had argued strongly that BAE needed to scale up to combat shrinking defence budgets.

Guy Anderson, defence industry analyst at the IHS Janes Consulting, said: "They (BAE) will be under enormous pressure to explain what Plan B is and they'll be punished if they don't... Investors are unlikely to be satisfied with business as usual."

However, Mr King said there was no question that they would seek an alternative suitor, because the failed tie-up had been a "unique opportunity".

He scotched talk they could try again in six months' time, because the distance between the various companies and government stakeholders was just too great.

Analysts believe BAE could become a target for the American defence contractor Lockheed Martin – as long as the Pentagon, a key defence customer, did not block the tie-up between two of its biggest suppliers.

A defence analyst at Echelon Research added: "Whatever happens now, BAE can never go back to the status quo of independence and stability."

Mr Olver insisted that there would be no management changes after talks fell apart just hours before last night's Takeover Panel deadline of 5pm to thrash out an agreement.

"The management team will absolutely remain in place," he said.

Plenty of analysts and investors disagreed, as BAE's shares – down by a third over the last five years – tumbled by 4.5p, or 1.4 per cent, to 320.9p.

The company's strategy involves increasing profits at existing divisions, such as electronic systems and intelligence, to offset a decline in traditional hardware sales, as well as expanding into new markets abroad.

Zafar Khan, an analyst at Société Générale, said: "BAE will need to broaden its strategy away from simply cutting costs. The company needs to diversify away from its defence focus, but the problem is that now is not the right time to be buying these [civil aviation] assets."

Ben Wallace, Conservative MP for Wyre & Preston, added that if the BAE board had "fatally wounded the UK's jewel in the manufacturing crown then they should consider their position".

Some shareholders were pleased that talks had ended.

"This was an awful idea from start to finish for shareholders and we are pleased it has failed," said one investor who holds shares in both firms.

One market source said: "People were afraid that they would end up embroiled in European politics. But shareholders are asking where BAE goes from here."

The GMB union also welcomed the news. "There were too many 'ifs' or 'buts' and grey areas which if the merger had gone ahead were areas causing serious concern," said Jim Moohan, GMB organiser in Scotland.

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