BAE Systems faces tough future after merger collapse

British arms maker BAE Systems faced an uncertain future on Wednesday after the collapse of a proposed mega-merger with European aerospace giant EADS, as indebted governments slash their defence spending.

BAE was also seen as unlikely to receive a takeover proposal from a fresh suitor in the near term after the pair said they had ended merger owing to a lack of accord with "various" government stakeholders.

"We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defence and security group," BAE Systems chief executive Ian King said in a statement announcing the breakdown of talks.

"However, our business remains strong and financially robust. We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate. We remain committed to delivering total shareholder value and look to the future with confidence."

Following news of the collapse, shares in BAE were down 1.48 percent at 320.6 pence in afternoon trading on London's FTSE 100 index of leading companies, which was down 0.41 percent at 5,785.50 points.

Analysts said that the defence industry would continue to struggle in the face of dwindling government defence budgets.

"BAE and its Western competitors still face the same challenges", said Guy Anderson, senior analyst at defence industry consultants IHS Jane's.

"Defence spend in Europe and the US is on a downward trajectory. Companies with high exposure to defence markets, and with little exposure to the recovering commercial industrial and aerospace markets, will need to convince investors that they have viable survival plans.

"For BAE, the continued sale of businesses gathered during the heady acquisitions boom of the 2000s is probable," he added.

BAE Systems was born in November 1999 when British Aerospace bought Marconi Electronic Systems, the defence arm of GEC telecoms group, and relaunched itself under the new name.

The London-listed group has since rapidly expanded and is now an expert in the field of defence, security and military, whereas most of EADS's work is in the commercial sector with its Airbus jet division.

"We do not think it is likely another suitor will enter the process in the short term," Atif Latif, director of trading at Guardian Stockbrokers in London told AFP.

"Margin cuts for defence companies are likely in the future and more realistic defence budget cuts are now looming."

BAE was originally a member of the Airbus consortium, but sold its 20-percent stake back to EADS in 2006, in order to concentrate on defence.

The group now manufactures a host of products ranging from military transporters to Bradley fighting vehicles, Challenger tanks and Queen Elizabeth aircraft carriers.

BAE is also part of the Eurofighter Typhoon consortium that includes the German and Spanish subsidiaries of EADS, as well as Italy's Finmeccanica.

In addition, BAE has ramped up its focus on the United States, with the acquistion of United Defense Industries for $4.192 billion in 2005, and Armor Holdings for $4.1 billion in 2007.

The US market now accounts for about half, or 45 percent, of BAE Systems' total group revenues -- making it the biggest foreign supplier of military goods to the Pentagon.

In recent years, the group's performance has been hit as military budgets were cut by London, Washington and elsewhere. It has axed 22,000 jobs over the past three years in response to reduced military spending around the world.

BAE now has around 93,500 staff worldwide -- including 48,000 at its operations in Britain, according to the group's website.

In the United States, BAE is a key supplier for the F-35 Joint Strike Fighter jet and is also responsible for the Trident nuclear submarine programme.

Despite falling military budgets, BAE's net profits surged by almost 18 percent in 2011 to 1.24 billion pounds.