Anticipated acquisition by BAE Systems plc of Detica Group plc

Affected market: IT services for the National Security and Resilience Sector

No. ME/3786/08

Please note that the full text of the decision can be downloaded by using the link on the right. What follows are extracts regarding the parties, the transaction, jurisdiction, third party views, assessment and decision.

The OFT's decision on reference under section 33(1) given on 15 September 2008. Full text of decision published 25 September 2008.

Please note that square brackets indicate figures or text which have been deleted or replaced at the request of the parties for reasons of commercial confidentiality.

PARTIES

BAE Systems plc (BAE) designs, manufactures and supports military aircraft, surface ships, submarines, combat vehicles, radar, avionics, communications, electronics and guided weapon systems.

Detica Group plc (Detica) is a business and technology consultancy that specialises in helping clients collect, manage and exploit information. Its Government Division serves the intelligence, security and resilience communities in the UK and USA, and its Commercial Division works with a range of commercial customers in the financial services, telecoms, media and utilities sectors. Detica's UK turnover for the year ending 31 March 2008 was £161.5 million.

TRANSACTION

BAE has agreed to purchase the whole of the issued and to be issued share capital of Detica. The anticipated acquisition is subject to the City Code. It was cleared by the German Competition Authority, the Bundeskartellamt, on 26 August 2008.

The transaction was notified by way of a merger notice on 1August 2008. The (extended) statutory deadline expires on 15 September 2008.

JURISDICTION

As a result of this transaction BAE and Detica will cease to be distinct. The UK turnover of Detica exceeds £70 million, so the turnover test in section 23(1) (b) of the Enterprise Act 2002 (the Act) is satisfied. The OFT therefore believes that it is or may be the case that arrangements are in progress or in contemplation which, if carried into effect, will result in the creation of a relevant merger situation.

THIRD PARTY VIEWS

Third parties' comments have been discussed above. In general third party competitors supported the parties' arguments that BAE's presence in the NSR sector was very limited, and that the activities that it does have do not bring BAE into direct competition with Detica. There were conflicting views from third party prime contractors concerning the possibility that the parties might withhold Detica's goods, services and expertise from prime contractors on current and future projects.

A third party competitor stated that in one specialist product area (not one within the NSR sector), Detica's only competitor was [ ]. It felt that competition in relation to this technology would be dampened post-merger by the fact that BAE is a major customer of [ ] (on the basis that [ ] would not want to upset relations with BAE), which could have cost implications for the supply of certain items of equipment for a Government [ ] programme. However, this concern was not advanced by the Government department in question. Furthermore, [ ] is owned by [ ]: since BAE's business does not make up a significant proportion of [ ] revenue, it is unlikely that the merger will have any significant impact on [ ] strategic behaviour as suggested by the third party.

Third party Government customers were not generally concerned by the merger, but were keen to seek assurances of Detica's commitment to existing contracts.

ASSESSMENT

This merger brings together a large defence contractor and a much smaller firm specialising in NSR products and services. Competition between the parties is extremely limited with, over the last 3 years, BAE only bidding for [ ] pieces of work in the NSR sector, while Detica entered over [ ] bidding competitions over a similar period. And in addition for the projects where BAE bid that also saw bids from Detica, the parties were bidding to work on different parts of the programmes. Third parties have confirmed that BAE and Detica are not close competitors, either in the civil NSR or defence NSR sectors. Thus, this case raises no competition concerns of a horizontal nature.

Third parties raised vertical concerns about the merger generating potential conflicts of interest, in particular that the deal might lead to situations when Detica gives client-side advice to customers regarding a project where BAE is bidding to be the supplier. However, the Government customers we spoke to were confident that they would be able to resolve any problems of this nature through their own procedures to guard against conflicts of interest.

A third party prime contractor was also concerned that the merger would affect Detica's commitment to its work as part of an existing consortia working for a Government customer. Again, the Government customer in question submitted that they could guard against this happening themselves. A decline in the quality of Detica's work on existing consortia post merger may also be unfounded given evidence from BAE internal documents that show a recurrent concern to preserve the value of Detica post-merger.

Another concern raised by some third parties was that in the future BAE would seek to withhold Detica's products and services (some of which are currently almost unique) from third party prime contractors seeking work that BAE itself wishes to tender for as a prime contractor. For this to be a concern, we would have to be confident that (a) BAE did seek to position itself as a prime contractor in the short term, and that (b) no other firm could develop products to compete with Detica's. Given lack of certainty about either of these, this theory of harm is speculative, and lacks any evidence to support it.

Consequently, the OFT does not believe that it is or may be the case that the merger may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.

DECISION

This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.

Back to top