Merger collapse: bad for both BAE and EADSPosted: 10/10/2012
National political constraints have caused the collapse of the planned merger of two of Europe’s main aerospace and defence companies, EADS and BAE Systems.
The deal foundered despite what the two companies said was the ‘sound industrial logic’ of the proposed deal. Following negotiations involving the British, French and German governments, the two companies said on 10 October: ‘It has become clear that the interests of the parties’ government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS had established.’
They had intended to create a company with the size and spread of the US’s Boeing, centred around the Airbus civil aircraft maker but with a strong presence in the global defence manufacturing market. This, indeed, had been the goal of different British, French and German governments as long ago as 1997. On that occasion, an all-British defence merger got in the way of a plan to create a European aerospace and defence champion.
On this occasion, the companies were in agreement but governments were unable to agree on how much influence each would be able to exert over the combined group. On the British side, the government holds no stake in BAE Systems but does have veto rights through a ‘golden share’. A complex shareholding structure has the French government owning 15% of EADS, with the Lagardere group holding a further 7.5%; Daimler, the German car-maker, owns 15% but exercises voting rights over a further 7.5%. The Spanish government owns 5.5%.
These stakes would have been diluted in a merged company, and the German government, if it wanted a direct stake to equal France’s, would have had to put up money to buy out Daimler. The sticking point appears to have been in potential limits on the size of future state holdings in the company. In addition, Germany reportedly demanded that the company be headquartered in Munich, rather than Toulouse. There were also concerns among all government customers – including the United States – about protection of national secrets and technologies, though most such worries could probably have been overcome.
The failure of the talks leaves BAE Systems, in particular, with uncertain prospects. While it still has a large and profitable defence business with global reach and a strong presence in the United States, its markets are shrinking. Its shareholders would have received 40% of a global company with an order book exceeding $700 billion. But now the company’s management will need to set out a new strategic vision, or else break up the company.
EADS, for its part, has a thriving civil aircraft business but lacks critical mass in defence – and now, no obvious means of building this. The deal would have given it more clout in the US defence market, which remains very large even if it is getting smaller. From the point of view of both companies, the failure of the merger talks is most unlikely to be the end of the story.