EADS, the parent company of Airbus, and Britain’s BAE Systems have confirmed that they have been in talks since June about a merger.
That would create an aerospace and defence giant bigger than US rival Boeing in sales and that would be better able to cope with defence spending cutbacks in Europe and the United States.
However, investors questioned the rationale of a tie-up and EADS’ shares tumbled 10.2 percent on Thursday, adding to the previous day’s fall and erasing more than half of the company’s gains made this year.
EADS stock, which earlier this week was up nearly 30 percent since the beginning of the year, has plummeted 16 percent since the merger talks were unveiled on Wednesday, wiping about 3.8 billion euros off its market value.
Shares in BAE fell 7.3 percent on Thursday, surrendering most of the gains made since the merger talks were revealed on Wednesday afternoon.
There are still many hurdles to be cleared, but sources close to the talks said the US government is not likely to block it. Indeed Washington has already been sounded out on an informal basis.
A combined company would be worth around 37 billion euros. The current workforce of the two is 220,000.
Sales last year for EADS and BAE together totalled 72 billion euros compared with Boeing’s 53.2 billion.
Boeing chief executive Jim McNerney said the Chicago-based aerospace leader was not fundamentally threatened by such a merger.
McNerney said BAE and EADS are following the same policy as Boeing in seeking to balance commercial and defence work. He said that “does reflect a global consolidation that is beginning to happen”.
BAE Systems is a supplier to Boeing for both its military and commercial aircraft.
US government approval would be needed as BAE is one of the largest suppliers to the American military.
Linda Hudson, chief executive of the US arm of BAE Systems, said the deal made sense given the downturn in US and European defence spending, but would also insulate the combined company against the inevitable cycles of the aerospace sector.
“It’s a win-win proposition for both companies in this environment,” Hudson said.
Executives at another major US defence industry player – Lockheed Martin – declined to comment.