BAE Systems is the UK's premier defence contractor with more than 85,000 staff

You have to go back 15 years to find an acquisition as large as the one BAE Systems announced on Monday.

The company said it was buying the military Global Positioning Systems (GPS) of Collins Aerospace, the US defence contractor, for $1.93bn (£1.5bn).

BAE is also paying a further $275m for a leading airborne tactical radios business from Raytheon.

It represents the biggest acquisition by the UK's premier defence contractor since its $4.1bn purchase of United Defense Industries, maker of the Bradley fighting vehicle, in March 2005.

Image: BAE says its electronics systems division will be significantly enhanced by the acquisitions

That deal was a landmark for BAE because it meant that, for the first time, the US Department of Defense overtook Britain's Ministry of Defence to become the company's biggest single customer.


Today's deals, BAE hopes, will represent a landmark in the expansion of its electronic systems division - into which the two businesses will be integrated. Electronic systems currently account for around a quarter of BAE's sales but more than a third of its operating profits.

GPS is of growing importance in modern warfare as precision munitions play an increasingly critical role in military operations.

Charles Woodburn, chief executive of BAE Systems, said he was excited about the deal: "These two acquisitions represent a golden opportunity to purchase high quality technology-based businesses, with market-leading capabilities, and long histories of leading innovation in their respective fields."

He said BAE had only been able to buy these businesses because their sale had been demanded by US competition regulators following last year's $120bn merger between the aerospace and defence groups United Technologies and Raytheon.

Dr Woodburn said the two businesses were focused on the highest priority areas of defence spending in the US - the world's largest defence market - and said both had good growth prospects because they were closely aligned to the Pentagon's strategy and to future US defence spending priorities.

Image: BAE Systems shares were the biggest risers on the FTSE 100 on Monday

He added: "The businesses have strong and sustainable margins. These are low-risk, high quality assets with exceptional discriminating technology and will accelerate our existing strategy."

The GPS business BAE is buying is already present in more than 280 ground, airborne and weapons platforms, such as guided bombs, missiles, artillery and rockets, including the two biggest weapons programmes for the US Air Force.

The size of that existing base should guarantee work in years to come as "next generation" upgrades of the technology take place.

Perhaps the biggest kicker for future growth is that US Congress requires by law that all military GPS equipment must be upgraded to use the next generation of GPS technology, known as M-Code, from October this year.

This is a new form of encrypted signal, used by the US military, designed to improve security that cannot be jammed by enemy signals. The new signal can be used in a more targeted manner than existing technology and also allows US service personnel to obtain information on the location of their allies.

It is able to detect and reject false signals sent by enemy forces in a practice known as "anti-spoofing". BAE said that, in total, more than 700 GPS platforms would eventually be upgraded to M-Code.

It has taken a while for the M-Code devices to obtain certification from the US government but BAE insisted that the development costs involved were now largely behind the business it is buying.

Image: BAE's physical defence interests include fighter planes, warships and tanks

The GPS business being acquired by BAE has a long history of trail-blazing. It was in the 1970s, under its original owner Rockwell Collins, the first to track live military GPS satellite signals from space.

In the 1980s, it was the first to produce military GPS equipment. In the 1990s, it was the first to develop handheld GPS receivers - technology, of course, which is now ubiquitous in mobile phones.

There will, however, be some scepticism about the deals.

BAE is paying 15 times the earnings before interest, taxation, depreciation and amortisation achieved by the GPS business, which is being seen on the high side, although this falls to just 12 times after tax benefits being acquired with the business kick in.

Asked by analysts why BAE was prepared to pay more for these businesses than anyone else, Dr Woodburn replied: "This is a perfect fit for our electronics systems business - which is one of the crown jewels of the group. These are opportunities we could just not afford to miss and that is why we went for them."

The other puzzler is why the combined UTC-Raytheon has chosen, at the behest of regulators, to sell the Collins Aerospace GPS business, previously part of UTC, rather than the smaller GPS business owned by Raytheon.

Image: The Tempest jet fighter is shown off at the Farnborough Airshow

Is BAE, critics will wonder, buying a business with weaker growth prospects than the one being retained by UTC-Raytheon?

Weighed against that is the fact that, after this deal, the US will account for nearly half of all BAE's sales while the company's dependence on Saudi Arabia - a factor that has deterred some investors from buying the shares - comes down.

Investors appear, as a result, to like the deal. BAE shares rose by 3.5% on the news to hit their highest level since July 2018.

Analysts Ben Bourne and Rory Smith, at broker Investec, told clients the acquisitions were of two "high quality businesses" and that they "appear sensible".

BAE, as shown by its relatively cautious approach to acquisitions in the last decade and a half, has often come across as a rather risk-averse business.

However, despite only being chief executive since July 2017, Dr Woodburn has embarked on some eye-catching initiatives - most notably the decision to embark on building a new sixth-generation jet fighter, called Tempest, due to be developed by BAE and its partners over the next two decades.

Dr Woodburn spoke on Monday of how the UK's biggest manufacturing exporter is feeling increasingly confident due to "improved political clarity" and the strength of its balance sheet.

These two deals suggest he is putting his money where his mouth is.