BAE must explain EADS tie-up rationale When Vince Cable, the UK business secretary, unveiled his new industrial strategy last week, he said the government would build a "collaborative strategic partnership" with key sectors, one of which was aerospace. This policy seems to imply a closer relationship between the British government and the industry's two biggest companies - BAE Systems and Rolls-Royce - than has existed since the two companies were privatised more than a quarter of a century ago. Barely had Mr Cable made the announcement when news broke of the proposed merger between BAE and EADS, the Franco-German-Spanish group. This provides an early test of Mr Cable's strategy. Since BAE - then known as British Aerospace - was privatised in 1985, successive governments, both Conservative and Labour, have not sought to influence the company's strategic decisions. Some of those decisions were ill-judged (notably the bizarre acquisition of Rover, the carmaker, in 1988) and the company's record for much of the 1980s and 1990s was patchy. Over the past 12 years BAE has largely withdrawn from civil aerospace and focused on military business, turning itself into almost a pure-play defence company with more than 40 per cent of its sales coming from the US. The question now is whether BAE needs a drastic change in strategy, shifting its focus to Europe and rebuilding its stake in civil aerospace to lessen its dependence on defence. At one level the benefits are not obvious. Although a merger would tidy up the ownership of some joint ventures in which both companies are shareholders, a link with EADS would not correct BAE's weaknesses - for example, in land systems, where EADS has no position - nor reinforce its strengths, such as its design capability in combat aircraft. The scope for rationalisation is limited because the two companies mostly operate in different sectors; EADS does compete in defence electronics, but it is much weaker than BAE. The larger and much more important issue is the future of BAE as an independent company. Does it need a stronger partner if it is to cope with reductions in defence spending in the US and elsewhere, ever-rising development costs in aerospace and defence, and the inevitable uncertainties over technology? It is arguable that BAE would benefit from access to German managerial, technical and financial strengths, and that its future would be more secure as part of a trans-European group. On the other hand, complex cross-border mergers are notoriously risky, especially where political considerations loom large. The merged company would have a more balanced portfolio than either BAE or EADS on their own, and in that sense would be more like Boeing. But balance is not necessarily a recipe for success. If BAE wants to reduce its dependence on defence, it could do so in smaller steps and in areas such as cyber security, building on existing skills. These are primarily commercial issues, to be decided by the BAE board and its shareholders. The question for the UK government is whether its vision of the aerospace industry as one of the country's greatest assets, making a vital contribution to exports, employment and technology, would be jeopardised if BAE merged with EADS. In his speech Mr Cable also mentioned the motor industry as one of the sectors which were of special interest to the government. Since the motor industry is almost wholly owned by non-British companies, it is clear that foreign ownership is not a bar to the kind of partnership which Mr Cable has in mind. Part of the UK aerospace industry - the two factories making wings and other components for Airbus - are already owned by EADS. There can be no guarantees about their future, but the involvement of BAE should help to ensure that decisions on the sourcing of components are taken on commercial grounds. Aerospace is special because of its links to defence, but, if the necessary safeguards can be obtained, there is no reason why the ownership of BAE by a European group should be against the national interest. What matters is whether the deal makes managerial and strategic sense - and on that BAE has a good deal of persuading to do. The writer, a former editor of the Financial Times, is a senior fellow at the LSE's department of management