3. What discussions he has had on the proposed merger of BAE Systems and EADS. (123713)

I was involved in a number of discussions regarding the possible merger of BAE Systems and EADS, as proposed by the companies themselves, prior to their mutual decision to end negotiations on 10 October.

I first pay tribute to the former Minister with responsibility for procurement. When we had problems and needed meetings to resolve difficulties, he was one of the very first to arrange such meetings. We never had a problem. Having said that, why did the Secretary of State not take into consideration the shareholding issues experienced by BAE and its associates? Does he not understand that this has caused a lot of unease among them?

I am not quite sure what the hon. Gentleman means by saying that I did not take account of shareholding issues. The Government made it clear that we understood the reasons why the companies were attracted to a possible merger and that we were willing to listen to the arguments for it, subject to setting out clear red lines about the UK’s national interest with regard to national security, our technology base and protecting jobs. It subsequently became clear that the UK’s red lines could not be satisfied while simultaneously satisfying those of the French and German Governments. It also became clear—I think that this is the point of the hon. Gentleman’s question—that not all the shareholders on either side of the transaction were satisfied that it made sense.

I strongly support my right hon. Friend’s red lines, but I put it to him that the palpable failure of BAE’s business model—which, basically, focused only on defence—and the shortcomings in its current management should not be allowed to drive us into an unsatisfactory situation, and that, such is the value of the assets that it controls, we may in the long run have to take a less than entirely hands-off approach to the company.

As my hon. Friend would expect, the Ministry of Defence has a close working relationship with BAE Systems as our largest supplier. The company has a substantial order book, a profitable business and strong cash flow, and it will continue to operate as an independent British business. Clearly, it will face challenges as its principal customers shrink their budgets, and it will need to adapt its business model for the future.