Behind the EADS-BAE mega-merger flop

Behind the EADS-BAE mega-merger flop
By Euronews
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The collapse of talks to form a 35-billion euro marriage between EADS and BAE Sytems has shifted focus away from mega-mergers and onto smaller deals among global weapons makers.

It was never going to be a simple affair. Three powerful European governments brought their own political demands to the negotiating table.

And in the end it just proved too complex to keep all parties – commercial and political – happy partners in what would have been the world’s biggest aerospace and defence company.

The head of EADS Thomas Enders told employees that should the merger come off, the company would be freed from government constraints that had held it back.

Those constraints were built into the corporate structure when the company was formed to protect national interests.

BAE’s main shareholder Invesco Perpetual had expressed serious doubts about the rationale for the merger.

And the British government, which holds a Golden Share in the company, was keen to avoid any state control to protect BAE’s lucrative relationship with the Pentagon.

The UK defence secretary Philip Hammond said: “It would have needed to be able to operate as a commercial company, free of undue control or influence by any single government. And that’s something that the company evidently has decided it’s not able to achieve.”

In the backrooms after the collapse, France blamed Germany, but Germany refused to take full responsibility for scuppering the plan.

Enders, himself a former German paratrooper, was quoted in the Financial Times newspaper saying he never imagined such opposition, especially from Berlin.

euronews asked aernoatics expert Dominique Dequidt, the head of KBL Richelieu bank in Paris, what the real reasons were behind the collapse of the merger.

“It would seem that Germany was a little left out of the responibilities that were decided by France and Britain, and Germany felt marginalised – that’s the first thing,” he told us. “Second, EADS’ defence activity is mainly based in Germany at Manching and the restructuring that was going to happen – principally by British Aerospace – was going to impact on German jobs. So it seems that the social risks in Germany pushed the government to block this merger.”

Antoine Juillard, euronews:
“Why did the stock markets given this merger the cold-shoulder ever since the start of negotiations? And what prompted these two groups to take up such a complex challenge?”

Dominique Dequidt:
“Right now, EADS is 80% civil aviation – a sector which is still expanding well even though it is cyclical – and the military sector is 20%, while it’s the exact opposite for BAE. The EADS management wanted to create a balanced group, roughly half-and-half military and civilian.
So even though civil aviation prospects remain strong and are currently in a mature phase in terms of profits, the markets saw it as a brake on potential EADS profits, which would be, in quotes, “eaten up” by BAE’s profits which having a harder time.
BAE are having to deal with cuts in US defence spending, and at the same time spending cuts linked to the withdrawal of American troops from Afghanistan and Iraq.”

“With the failure of these talks has EADS closed the door to the American defence market for a long time?”

Dominique Dequidt:
“In its communiqué just after the collapse EADS opened the door to possible deals with the BAE group – not based on a capital structure – but on commercial deals between BAE and EADS. So there is maybe a door open to the American market.
But it’s clear that it will be harder for EADS, especially as EADS, through its military subsidiary Cassidian, is in a much weaker position compared to BAE, which dominates the military domaine in Europe.”

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