Should we cheer for the EADS/BAE merger?

 
Typhoon fighter jet BAE systems is currently Britain's largest defence contractor

When we are beating the Americans, all of a sudden the British feel very European. That is the implication of the day of national celebration that seems to have been triggered by Europe's against-the-odds triumph in the Ryder Cup.

And of course when the continent and its eurozone is in a financial and economic mess, we congratulate ourselves on retaining British national identity and sterling, rather than the battered euro.

How does the planned merger of our largest manufacturer and defence contractor, BAE Systems, with Franco-German EADS - maker of Airbuses - fit into our complicated sense of our national interests and who we are?

BAE and EADS see themselves as trying to forge the equivalent of our victorious golfing squad. They want to become Europe's Boeing, by creating a vast hi-tech conglomerate split 50:50 between defence and civil operations.

The commercial rationale goes like this. For BAE, it is about lessening the impact of a massive squeeze by the UK and US on defence spending, helping EADS to improve the profit margins on its own smaller defence business and securing access to the billions of euros in EADS's coffers (the combined group would have 18bn euros of net cash, I am told) for deployment in research and development.

For EADS, the primary motive of the chief executive, Tom Enders, appears to be to depoliticise his company - by securing the agreement of the German and French governments to end their control over the company and behave like normal investors.

Critics of the deal see it differently: they fear a sprawling, too complicated, bureaucratic global monster will be created through the 34bn euro merger, too subject to interference by profit-destroying French and German ministers; and in the process vital British intellectual property would become shared with competitor economies, UK jobs would be at risk and Britain's defence would become more and dangerously dependent on overseas suppliers.

Here's the problem: it is impossible to adjudicate definitively between these views, because much depends on whether the French and German governments are ultimately prepared to let EADS/BAE evolve into as normal a commercial business as is possible for a company in defence and so dependent on government contracts.

On a knife edge

Right now the auguries are mixed. The French and German governments seem prepared to abandon their formal agreements that give them direct control over EADS. But their insistence on shareholdings of at least 9% each in the enlarged group, and perhaps more, speaks to a reluctance to let go.

As it happens, if France and Germany are ultimately unprepared to give the company its freedom, all the above becomes irrelevant - because the US government, which is BAE's biggest customer and would even be the biggest customer of EADS/BAE, would blow up the merger by making it clear that it would no longer be prepared to award sensitive contracts to the new corporate monster.

Right now this deal is on a knife edge and could go either way. On the margin, I think it is likely that France and Germany will cede enough ground to let it proceed - because if the marriage were called off, BAE would then become very vulnerable to being taken over by another business, having publicly admitted that it is strategically challenged.

The acquirer of BAE in those circumstances would almost certainly be a US defence giant such as Lockheed or Boeing itself. That would reinforce America's control of the global defence industry and leave Europe looking as though it might never again win the industrial equivalent of the Ryder Cup.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 14.

    This move is not visionary & not a game of golf. Just look at the Indian fighter deal to see how the French will play their cards in future (the BAE/EADS Eurofighter lost out to the Dassault Rafale (Dassault being 44% owned by EADS...)). Naval shipbuilding too will probably be sold off as "non core" if this goes ahead. We need national vision in industrial policy - not just an obsession with jobs.

  • rate this
    0

    Comment number 13.

    My first overwhelming impression as I read your article was this:
    Why is everything trying to get bigger, merging? This is how the customer becomes a clog in a huge machine that chews him up & spits him out.
    Banks were better when they were smaller & strictly in the business of lending. Bigger is beginning to scare me - Ants and giants come to mind.

  • rate this
    +4

    Comment number 12.

    I believe BAE are desperate to move away from being 100% defense company . It was a massive error selling out their share of Airbus . Defense spending in the USA will be cut 20% in the next few years and the UK won't be far behind . Hopefully Afghanistan will be last of the these pointless and counter productive "Freedom "campaigns .

  • rate this
    0

    Comment number 11.

    Pentagon budgets may be under pressure but things like the BAE rail gun (videos on Youtube) suggest that BAE is currently right at the heart of it.

    But every Pentagon contract nowadays seems open to years of judicial review demanded by vexed contractors with no B in their name. Fact or perception, these guys will surely already be lobbying on the basis that BAE will no longer be trustworthy.

  • rate this
    0

    Comment number 10.

    A good report on a tricky conundrum for our defence sector
    US contracts will probably be spun off anyway

    Large scale co-operation has already happened in Europe, the most obvious example being the Concorde project
    The USA abandoned us and tried to trash the project so we got together with the French and Concorde happened

    The USA is extremely unreliable for these things, the EU is our best option

  • rate this
    +2

    Comment number 9.

    Jobs will never be lost in France. Just like our car industry of old, if job losses are required in the future it will be Britain that loses them because it is easier. Just look at Peugeot where the French government will not allow French plant closures but suggest closing Madrid plant first.

  • rate this
    -1

    Comment number 8.

    Cheers or not, UK is preparing neatly for the march of Eoro obfuscation. In a small step for Boris, our pensioners can now travel fee to work from 60-72 before retiring.

    Meanwhile significant statement on the state of the economy has devolped north of our bordars.....
    http://www.bbc.co.uk/news/uk-scotland-north-east-orkney-shetland-19783214
    We may have turned corners, but are heads still buried

  • rate this
    +2

    Comment number 7.

    Ceding control of strategically sensitive industries to foreign owners has proved to be a mistake - just look at the utilities and the new nuclear power stations saga. And be in no doubt - the new behemoth will not be British-owned, at least not in the medium/long term.

    Also, agree with the anti-competitive sentiment of other bloggers. Bigger only means more opaque and corrupt and monopolistic.

  • rate this
    0

    Comment number 6.

    Unlike the banks the aerospace industry was not responsible for de-stabilising the economy - on the contrary. It is a strategic industry and the government must retail an interest in it beyond the last contract. There could be a further separation of the defence and the commercial wings of the company although there is some considerable synergy between the two.

  • rate this
    +2

    Comment number 5.

    Cheer?

    Divided. I do not like arms manufacturers, period. But I also concede that we unfortunately need them - so they should be run as efficiently as possible - without contributing to the increase global corruption. The last point is important and in fact one of the reasons I do not approve of the business.

    Big business in this sector is very corrupt. But is even bigger worse or better?

  • rate this
    +4

    Comment number 4.

    More foreignising
    More loss of British jobs

    Its not as if 'we' will have much remaining, in the industry, that is British, after the sale.

    This reduces British skills & expertise to a low level as did sale of Cadburys, Rover etc etc - list is endless

    At least when all is gone there'll be nowt left to sell & economy will have a proper real recession & then most of foreigners will leave

  • rate this
    -1

    Comment number 3.

    As with the banks and elsewhere, we should be breaking these businesses up. If business thrives on competition, then mega-corporations are not going to help.

  • rate this
    -1

    Comment number 2.

    Its got to be in the UK's longer term interests - BAE wouldn't go after this merger otherwise.
    Is most of the noise against this deal coming from those who have vested interests to the west of the UK?
    During the time EADS and BAE have dominated the news, it is surprising there has been no media updates on the investigation into the shooting of EADS-Astrium engineer from Surrey, Mr Al-Hilli.

  • rate this
    +5

    Comment number 1.

    We are already talking about vested interests from the architects of the possible deal. The UK needs this dilution of the aerospace and defence sector like a hole in the head.
    This is about a few suits getting paid for a transaction and the ramifications are staggering, we are led by fools who can't see past the next pay check or board seat.
    Come on Robert say it like it is!

 

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