On the EADS/BAE merger front, my initial reaction was not favourable with the emphasis in my opinion targeting size over quality. On the defense front, I think it would have made more sense for BAE Systems to look to merge with Cassidian, which is the defense side of EADS bringing complementary strengths in terms of capabilities and regional market areas of focus (BAE Systems is strong in the US while Cassidian is having success targeting opportunities from emerging markets such as South America). I believe a BAE Systems/Cassidian match would better service the defense market with a focus on systems and capabilities rather than offering whole platforms and certainly as an example, we see the success that Raytheon and Northrop Grumman are starting to achieve targeting the fast-jet radar retrofit market.

On the other hand, the inclusion of the aerospace side of the business would have brought scale to the potential new company, but I also wonder whether the issues that Airbus has had with some its platforms, e.g. the A400M would have brought any immediate advantages to the company. Even on the commercial front, Boeing was way ahead of Airbus in terms of orders if we take this year’s Farnborough Airshow as one example (Boeing aircraft orders 370 vs. Airbus aircraft orders 101) and based on this, the new larger company was not necessarily going to bring about any advantages.

You then also have the issues of sovereign control and rather whether France, Germany and the UK would have been willing to let go of the control they have especially where the respective companies have been involved in developing bespoke systems and platforms. The governments of these countries needed to ensure that they didn’t lose capabilities and suppliers as a result of the new company shifting emphasis to other markets. Obviously, this is why we saw a lot of talk about certain contracts and activities being ring-fenced.

Across the pond, parties in the US will have had similar concerns especially given the inroads that BAE Systems has made into that market. We can also expect that Boeing would have used these concerns to try and block the merger and/or try to block the new company from competing in future US programs.

Having said all this, it is the very fact that the two companies are so disparate that could have helped drive the merger forward. There were no obvious overlaps with the activities of the two companies so we were not going to see necessarily see employee headcount reductions, facility closures with both sides of the merged company continuing operations as normal.

Ultimately, it would appear that the political hurdles presented by the French, UK and German governments have been insurmountable on this occasion. Both Tom Enders (EADS head) and Ian King (BAE Chief Executive) have expressed regret that they were unable to bring the merger together. No doubt we will not see similar sentiments from Invesco and other BAE Systems shareholders.

Webinar: AESA Radar Applications and Market Trends

Register Here for this Webinar

Date: January 25, 2011
Time: 11:00 am EST
Presented by: Asif Anwar, Program Director, Strategy Analytics

Webinar Description:
AESA RADAR is fast becoming the must-have capability for next-generation defense platforms. Wide-ranging military applications of AESA RADAR are coming into service and this is creating a long tail of engineering demand and associated revenues. Strategy Analytics has been tracking these developments closely and this webinar will provide insights into basic principles, advantages, enabling technologies and future direction of AESA RADAR.
Strategy Analytics will provide examples and describe:

• Northrop Grumman could expect to receive an approximately $920 m share of the entire $2.3 bn award for the purchase of up to 670 LITENING SE advanced targeting pods through 2017 as part of the Air Force's Advanced Targeting Pod – Sensor Enhancement (ATP-SE) program
• Other Navy news included another success for Lockheed Martin for $97 m award for the DDG AEGIS production contract
• Boeing gained an extension to its Small Diameter Bomb contract with a $106 m award;
• LONGBOW Limited Liability Company, the joint venture of Lockheed Martin and Northrop Grumman, received a $26.8 m contract from the US Army Aviation and Missile Command for LONGBOW Fire Control Radar (FCR) Life Cycle Contractor Support;
• The French arms procurement agency DGA awarded Astrium a €795 m contract for two satellites for the optical space component (CSO) that will replace the current HELIOS 2 military observation satellites.
• Raytheon received a contract totaling $240 m for the US Navy’s Arleigh Burke class of warships for AEGIS radar systems.

With defense budgets being cut, it would appear that the defense industry was in the early stages of a downwards cycle in 2009 as growth trends were reversed.  Year-on-year revenues declined 4% in 2009 versus the 11% year-on-year growth experienced over the 2007-2008 timeframe. This translates into compound annual growth for industry revenues more than halving for the 2005-2009 timeframe, growing at only 3% versus a CAGR (compound annual growth rate) of 7% for the 2004-2008 period. Overall profitability in the industry also dropped significantly year-on-year by over 42% in 2009.   Boeing, EADS and BAE Systems were amongst the revenue leaders, while Lockheed Martin, Northrop Grumman and Raytheon were amongst the top eight companies that generated profit margins of 5 percent or more.  2010 has continued to be a year of adjustment for the industry overall; however, demand will return with a particular emphasis on implementing advanced technologies for existing platforms.  The following companies have been covered in this series of reports: BAE Systems, L-3 Communications, Boeing, Lockheed Martin, Cobham, Mitsubishi Heavy Industries, EADS, Northrop Grumman, Finmeccanica, Raytheon, General Dynamics, Rosboronexport, Harris Corporation, Saab, Honeywell, Textron, Israel Aerospace Industries, Thales, ITT Corporation and United Technologies.  The financial performance of each company (with some exceptions) is outlined and discussed in the context of their activities within the defense sector, highlighting core strengths, perceived weaknesses and overall competitive positioning in the market.  For further details on these individual companies, take a look at the following reports:  Defense Industry Company Profiles: Part 1 Defense Industry Company Profiles: Part 2

• COTS: Military Embedded Computer Opportunities - $2B and Growing
• Cost Implications of COTS Obsolescence Management Trends
• Environmental Directives Underline Need for Long Term Acquisition Strategies in COTS Electronics Sourcing 

Dr David Allstot from the University of Washington kick-started the 2010 IEEE Radio Frequency Integrated Circuits Symposium with a review of the challenges and ongoing research into CMOS power amplifiers for use in the cellular radio front-end. Highlighting the energy consumption and CO₂ emissions from cellular handset usage, Dr Allstot emphasized the need for more efficient PAs as continued motivation for development of CMOS PA technologies.  Research into CMOS PAs has been ongoing for around 20 years, with current designs achieveing around 1W power outputs and up to 60% PAE. The performance of typical power amplifier PAs including Class A, B and E were highlighted, and then put into context with the demands of current networks which place greater importance on PAs operating backed off from peak power with schemes such as 64QAM resulting in probability distributions that translate into actual efficiencies of only 5%.  Dr Allstot provided examples of digital PAs comprising multiple PA cells and power combining techniques that have been put forward to address these issues, and highlighted the potential for Class G power PAs that feature a hump-shaped curve with the first peak aligning with probability distribution curves of a 64QAM spectral signal and offering the potential for efficiencies as high as 24%.  While these results are promising, Strategy Analytics still sees a gap in performance capabilities between GaAs and CMOS PAs which is compounded by cellular handset requirements continuing to evolve. This translates into a moving target that places greater emphasis on linearity, efficiencies and peak-to-average ratios (PAR) and in our opinion will continue to favour the capabilities offered by compound semiconductor technologies.  Nevertheless, the pervasive nature of RF technology will open up doors for CMOS and SiGe PAs, while also continuing to provide growth the compound semiconductor technologies, and this was highlighted by the second plenary talk, given by Gregory Waters of Skyworks Solutions Inc.  Mr Waters provided an overview of how the growth in the cellular handset market has transformed the RF industry into a mainstream technology with future trends pointing to greater pervasive use of RF in multiple applications. Smartphones are leading the initial trends towards more complexity in the radio chain which translates into greater content and provides continued growth for the industry.  Video is the primary driver for the RF market moving forwards with social media driving demands for always-on connectivity. This in turn will translate into more RF content going into terminals to meet these needs. Skyworks estimated that average RF content has increased by around 2.5 to 4x the content required when delivering voice-only capabilities.  The different approaches in the cellular front-end to handle these growing needs were highlighted, from multiple PAs through broadband PAs able to tackle high-band and low-band RF chains, to solutions that will cover all bands through a converged solution. This will be coupled with techniques such as envelope tracking and digital predistortion to provide more linear, more efficient RF solutions.  The other key message from Skyworks was that RF technology will become even more pervasive in its application moving forwards, with embedded RF translating to multiple applications, examples including smart metering for utilities, vending machines and passive RF technology for tracking applications.  To serve market needs moving forwards, RF companies will need to continue developing a broad base of technologies that incorporate not only the RF, but also interconnects and packaging   Strategy Analytics sees this pervasiveness as a catalyst that will open doors for Si technologies while the growing complexity needed to serve the always-on connectivity will present continued opportunities for compound semiconductor technologies.

Join Strategy Analytics for breakfast in Rome, Italy on September 30th during European Microwave Week. To register for the breakfast, go to http://www.strategyanalytics.com/default.aspx?mod=eumw We'll be presenting key findings from the Strategy Analytics Advanced Defense Systems (ADS) and GaAs and Compound Semiconductor Technologies (GaAs) services at an invitational breakfast meeting during European Microwave Week, 2009 in Rome, Italy (28th September to 2nd October). The focus will be on defense market demand for GaAs (gallium arsenide) and GaN (gallium nitride) semiconductors. This invitational complimentary session will provide attendees with an overview on a range of topics including: •    GaAs and GaN market status and future trends •    Defense market demand trends •    A case study - analyzing component demand from defense platforms You can register for the breakfast at http://tinyurl.com/saEuMW. Hope to see you there!  Follow us on Twitter http://twitter.com/sentwistle1419