Due Diligence

Due Diligence
March 13th, 2008  
Team Infidel

Topic: Due Diligence

Due Diligence
Washington Times
March 13, 2008
Pg. 14
By James Lyons
The announcement that the U.S. Air Force chose the Northrop-Grumman-EADS team to build 179 tanker aircraft at initial procurement costs of $40 billion should have come as no surprise to anyone following the competition.
Studies last year showed the Northrop-EADS KC-30 tanker had distinct operational advantages. Loren B. Thompson, a defense consultant at the Lexington Institute, said Northrop-EADS KC-30 bested Boeing's 767 tanker version in four of five categories, adding that Northrop's winning bid was not a close call.
Heads should roll at Boeing. After the debacle of its failed leased tanker deal, Boeing certainly had to be aware of the capabilities of the competition's tanker. And yet, instead of taking a bold new approach using the 777 airframe as the tanker's chassis it appears Boeing gambled that, because of its close relationship with the Air Force, it could convince it to accept the good but inferior and already obsolete 767 airframe. While this is not a classic "two-way street" deal, it could certainly fall under that umbrella.
One must also expect that Northrop Grumman did extensive due diligence on EADS' past unethical practices and verified beyond a shadow of doubt that EADS has cleaned up its act. In the past, EADS benefited from the French government's policy of industrial espionage and bribery to give their favored companies an unfair advantage over U.S. firms (the French government owns 15 percent of EADS).
In a 2003 article, the Economist magazine cited EADS/Airbus bribery that was subsequently confirmed by a European Parliament report on the company's corrupt practices. EADS has also tried to circumvent U.S. law to help Venezuelan dictator Hugo Chavez. In January 2006, the U.S. invoked international arms trade regulations (ITAR) to stop EADS from selling Spanish-built transport and patrol planes with U.S. components to Mr. Chavez. Under ITAR, nations cannot sell military products containing U.S. components to third countries without U.S. approval. EADS was notified of our objections but attempted to go ahead with the sale by trying to replace all U.S. components. EADS failed and the sale did not materialize.
Another question both congressional investigators and Pentagon logistics watchdogs might want to pursue is whether Northrop-Grumman, as part of its due diligence, determined the extent of the Russian government's ownership in EADS and more important, the role the Kremlin wants to play in EADS management. When the British government decided in 2006 to get rid of its EADS holdings, Vladimir Putin's regime secretly bought up more than 5 percent of EADS through the state-controlled Vnesktorgbank. This was a serious coup because Vnesktorgbank did not let EADS know of its acquisition until October 2006.
Kremlin officials have allegedly said the Russian government intends to buy up to 20 percent of EADS on the international market a big enough stake to give the Russian government the ability to influence management decisions and even place a Putin associate on the EADS board of directors.
Hints have surfaced: In February 2007, Mr. Putin told the French defense minister that Russia's "purchase of stock is not a hostile takeover" and that Russia was ready for a constructive relationship. Subsequently, Mr. Putin told the Germans he insists on Russia's capability to have a hand in EADS corporate matters.
These developments are troubling. The Moscow-EADS relationship could very well provide Russia access to sensitive Western technology developed or acquired by EADS. EADS has said it is standing firm against Mr. Putin's demands and rejected a Russian attempt to buy a seat on the board in the fall of 2006. How long EADS can hold out, however, is unknown.
The Northrop-Grumman-EADS team clearly had the more capable tanker. What is of concern is that neither Northrop-Grumman, nor EADS, nor for that matter the Pentagon have weighed in publicly on the implications of Russia's current and future role vis-a-vis EADS, the danger that Russia could siphon off sensitive Western technology, and the potential impact the Kremlin might have on the ability of EADS to fulfill its contractual commitments. We need to hear from all parties on this troubling situation.
James Lyons, U.S. Navy retired admiral, was commander in chief of the U.S. Pacific Fleet, senior U.S. military representative to the United Nations, and deputy chief of naval operations, where he was principal adviser on all Joint Chiefs of Staff matters.

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