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, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    0

    Comment number 94.

    I would just like to make the point that there is a large British contingent in EADS especially in the space sector through Astrium. It may have no bearing on the argument but it should at least have been mentioned in the article to make it sound less like the Europeans are taking over British defense.

  • rate this
    0

    Comment number 93.

    BAE have a very distinct distaste of the civil aerospace market, as I experienced when trying to interest them in a revival package for Woodford (now trashed) in 2009.
    Now they want to merger with a Euro-company that has strong civil ties?
    I can see some serious issues surrounding such a combination of European civil versus military (American) demands.

  • rate this
    0

    Comment number 92.

    89.goenzoy
    1 Hour ago
    88.powermeerkat

    A healthy competition between Airbus and Boing ( Eurpope/ US ) is a good thing.
    +++

    I agree. Any monopoly is a bad thing. Btw. When I enter B-748 or A-380 I don't see much difference. Cabine looks almost the same; its crew is international. Though I do notice a difference flying a Dreamliner (B-787): higher pressure&humidity making a flight better.

  • rate this
    0

    Comment number 91.

    90.ComradeOgilvy
    86.pmk

    "And re Ogilvy: you shouldn't feel inferior"

    What are you on about?
    +++

    Re UK feeling inferior...

    No reason. All major military R&D programs require multinational contributions. Re F-35... UK did its share (just like Austrialia, Turkey, etc.) and will be in the 1st tier of those who'll get those fighters.

    As for UK carriers/Nimrods - none of my business.

  • rate this
    0

    Comment number 90.

    86.pmk

    "And re Ogilvy: you shouldn't feel inferior"

    What are you on about?

  • rate this
    0

    Comment number 89.

    88.powermeerkat

    A healthy competition between Airbus and Boing ( Eurpope/ US ) is a good thing.If we end up with save passengers on both site of Atlantic
    with this competition and defence spending is helping passenger security everybody should be happy.I m happy to sit in a Boing when it s save
    and any American should be sitting in a Airbus

  • rate this
    +1

    Comment number 88.

    austriacus: "A European Union advisory group says that Europe's banks should be split into separate legal entities, in order to protect ordinary retail banking from risky trading.[...]

    Banks likely to be affected include Deutsche Bank and BNP Paribas.
    (BBC)


    So much for Franco-German alliance.


    P.S. You've mentioned Boeing. B. just got a $6 bn order from Brazilian GOL for 60 737 Max.

  • rate this
    0

    Comment number 87.

    yes EADS,Based in holland for corp tax advantages,lakshani mittal on the board,Bae partly owned by the middle east.
    we do have enginneeers we do have science that they desire that is why they bought up Astrium for satellite and space technology,but the aerospace is truly global and Bae has a lot to offer trained personnel and maybe this is crucial,factories under utilised mmm

  • rate this
    +1

    Comment number 86.

    austriacus":"And if I were EADS, I would wait to see the outcome of the UK referendum on EU membership, which will undoubtedly come within the next 3 years."


    In three years such a referendum may not be necessary.

    Sapienti sat.

    And re Ogilvy: you shouldn't feel inferior. F-35 is being developed because of the financial contributions of such countries like UK, Turkey and many others.

  • rate this
    0

    Comment number 85.

    "Being dependent on allies is OK of course... for as long as you remain allies" - is the whole point. Despite PM's remorseless jeering at us from across the Atlantic, the US is also in desperate financial trouble that could take decades to unwind. These are dangerous times.

  • rate this
    +1

    Comment number 84.

    "The USA abandoned us"

    How?

    "so we got together with the French and Concorde happened"


    And what have you accomplished with that? Small, unneconomic plane with no range allowing it to fly most profitable Pacific routes.

    Now in museums.

    And no follow ups.

  • rate this
    0

    Comment number 83.

    82.pmk

    The point is that it is a dependency on the US and not independent.

    Being dependent on allies is OK of course... for as long as you remain allies. There are some Middle Eastern nations that may feel a little let down having fallen out of favour.

    I am not against independent defence. I think we (the UK) can no longer claim to have it.

  • rate this
    +1

    Comment number 82.

    "Hmmm, you'd rather we relied on the America's defensive umbrella? "




    Canada has been living under US protective umbrella, including NORAD, for 60 years. Name one instance that country felt endagered or left alone.

    [Ditto for Australia, Germany, Japan and South Korea]

  • rate this
    0

    Comment number 81.

    This merger will never work.BAE went away from the Airbus project on
    the ground of National Security in UK and huge potential profits during
    US/UK lead Irak war.Airbus is better off to corporate with Russia or Brazil
    to make EADS less depending on defence contracts and only deal with
    Airbus and space related projects

  • rate this
    0

    Comment number 80.

    On the plus side, there's nothing anyone would want in the UK any more, so we won't really need worry to much about defence.

  • rate this
    0

    Comment number 79.

    Its all about fees. The City has the attention span of the three year old on aspartamine. Smash, grab, ransack, take the fees and leave the rump of the company with the bill

    Many foriegn owned comapnies show that UKs problem isn't Brit engineering, / designers / workforces - Jag, Honda, LR, Nissan - problem is a predatory financial sector and scumbag senior managers who line their own pockets

  • rate this
    0

    Comment number 78.

    #61 as eisenhower feared and roosevelt, once ur militairy get involved in security and arms production, we move into shadow lands shadow banking shadow goverment,defence of the realm and all that stuff, we will not need muck UK plc maybe just 100000 service personel to defend us from who the USA, RUSSIA,CHINA,
    Its pure market the city needs to sell something to keep the cash flow going around

  • rate this
    +1

    Comment number 77.

    It is a sad reflection on the modern world that guns, bombs and vehicles from which to fire them are our biggest export industry.....

    ....ready availability of weapons doesn't cause striffe/wars but it does allow them to get out of control (aking to wildfires) once they kick off.....

  • rate this
    0

    Comment number 76.

    "Yeah, manufacturing any old tat will do for some of the toughest consumers out there - governments. Yep, easy money."

    Have you followed any of the endless chaotic defence procurement stories over the last forty years? Seems like easy money to the rest of us - who pay for it.

    So ruinous and abysmal at supplying what the troops need they're being sacked to keep the arms manufacturers profits up

  • rate this
    +2

    Comment number 75.

    Seems to be a old up to the deal because the germans want it to be 70/30 in favour of EADS and the french want the HQ to be based in france. Hahahaha they can go whistle, both make the same profits of just over a billion so it should be a equal merger with HQ based in UK for defence n security reasons.

    Just use the veto n kill it.Too many jobs n UK defence at risk.

 

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