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Saturday, 20 December 2014

Move over, Olver

BAE needs a new chairman

BAE Systems needs a new chairman. Dick Olver’s management of the attempt to merge the UK defence group with EADS was poor. He has also presided over a sustained period of share-price underperformance. After eight years on the board, he should make room for fresh talent.

It is easy to see why BAE pursued a tie-up with EADS. The enlarged group could have won bigger contracts, reaped cost savings and gained buying power. OK, so it was unexpectedly stiff opposition from Angela Merkel that ultimately killed the deal. But the difficulty for Olver is that he led BAE into a project with shaky foundations. BAE’s own shareholders were doubtful. Invesco, with 13 percent, was incensed by a perceived strategic U-turn. The UK-based fund manager went public in its push-back campaign - a clear sign that relations with the board had broken down. Privately, other big shareholders echoed its concerns.

In M&A, it is the chairman’s job to anticipate, manage and win over potentially sceptical investors. Not only did Olver fail, he should have known better. Comparisons with Prudential and G4S are apposite. Ambitious plans by both companies foundered on the reaction of their own investors; and the chairmen left in the wake of the reversals. While Olver couldn’t have made BAE’s top investors insiders on the deal, there are ways of softening up shareholders up for big strategic moves. And if that really was impossible, he is still culpable for failing to limit the damage once the EADS talks deal leaked.

Olver would be in a stronger position if BAE’s operating and share-price performance was better. But, as Invesco notes, its price-earnings ratio is low both historically and relative to peers. The stock has underperformed the FTSE-100 for the last three years. And Olver was in the chair when BAE overpaid for two big acquisitions in 2005 and 2007. From here, BAE faces flat revenues at best. Its progressive dividend policy looks uncomfortable.

A new chairman would provide a chance to repair investor relations, take a fresh look at strategy and give new impetus to BAE’s efficiency drive. Olver is likely to retire in 2014 anyway. The board should accelerate his succession.

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