Is the BAE/EADS merger a dead duck?

 
BAE worker

For all the flak thrown at the boards of BAE and EADS in recent days, they do not believe their plan to merge the huge defence and aviation companies is dead. But are they right?

Well-placed sources tell me that they are likely to decide tomorrow night to request a 14-day extension to the timetable for getting all the necessary ducks in a row - which is an essential pre-condition of them coming out of purdah and announcing the detailed terms of the marriage they seek.

But is it really worth it, in that those ducks seem to be the least herdable and most ornery of any quackers I've encountered?

In just the last few days, we learned that the German and French governments remain a long way from surrendering the kind of shareholder influence over the enlarged company that would persuade the British government to back the deal - and, perhaps more importantly, would also dissuade the US government from taking BAE off its list of privileged defence suppliers.

In simple terms, the deal cannot happen unless France and Germany both agree that they will never own more than 9% each of the enlarged group and that they will have no formal pact to act in concert.

For BAE, a positive sign is that the French, German and UK governments are having proper talks about this. And, for reasons that slightly elude me, BAE's senior people do not seem terribly worried that the French are refusing to agree this ceiling on its ownership and control.

Meanwhile 45 Tory MPs have written to the British prime minister expressing concern that the UK's industrial and national interests could be jeopardised by the tie-up.

And as a reminder that this is not just about politics but is also about the wealth of those who own BAE through their pension schemes and savings plans, BAE's largest shareholder, Invesco Perpetual, has put out a statement savaging both the putative strategic logic behind the deal and its financial implications.

Invesco, which is far and away BAE's most important owner with 13.3% of the company, warns that BAE's all-important US military revenues could be undermined and also that the likely terms of the deal with EADS undervalue the British company.

Is there really nobody apart from the boards of the two companies in love with the idea of this merger?

What is galling for the directors of BAE and EADS is that, under the takeover rules, they are banned from promoting the rationale for the deal until a formal offer has been put to shareholders. Which means that day after day all the noise about the transaction is of a relentlessly negative character.

And here is what may finally tip BAE's directors and their advisers into a realisation that the obstacles to the merger may be insuperable: the British prime minister and his cabinet are not as enthusiastic about the deal as they seemed to believe.

The attraction for the British government of the merger is that it might reduce the risk that one day EADS could decide to relocate the manufacture of wings for Airbuses away from the UK.

Airbus UK is a vital part of the country's hi-tech manufacturing capacity, supporting something like 140,000 jobs in Britain in total. And the government has long been uncomfortable that it is owned by EADS, because EADS is in turn 50.5% controlled by the French, German and Spanish governments, which are united by a concert-party agreement or ownership pact.

So if the merger of BAE and EADS was accompanied by a reduction of around a third in the direct investment of these governments and a tearing up of the ownership pact, then that would be seen by David Cameron as a big win for Britain.

But against that, I am told, is his concern that the merger would leave the French and German states with the ability to influence the biggest and most important engineering business in the UK, BAE - and could in theory make it harder to protect our military technology and secrets.

What is more, he is concerned that what he sees as the UK's vital military links with the US could be weakened by the europeanisation of BAE - which, as just one example, could damage British work on the Joint Strike Fighter programme.

All of which suggests that the crunching together of BAE and EADS may never move from being the beautiful dream of the two boards into hard reality.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

UK living too high on the hog (again)

How worried should we be by the UK's record current account deficit, our inability to pay our way in the world?

Read full article

More on This Story

More from Robert

Comments

This entry is now closed for comments

Jump to comments pagination
 
  • rate this
    +2

    Comment number 26.

    @17 gusgog

    "Er, where would the money for this come from?"

    Where did the money come from to bail out the banks, I think people would prefer to see their money going to hi tech manufacturing firms.

    "EADS is dripping with cash from the deposits lodged on a stupendously large Airbus order book."

    What difference does that make, at the end of year both companies make the same profit.

  • rate this
    +8

    Comment number 25.

    The examples of EU Mil takeovers is poor:-
    Ferranti Underwater Systems by Thomson then by Thales: far smaller UK ops

    Marconi Underwater Sys Ltd by Thales: far smaller UK ops.

    BAe Dynamics by MBDA: far smaller UK ops

    Racal by Thales: rampant decimation of UK sites.

    BAE Crew Toll by Selex Galileo: downsizing

    Sole success (?) BAE Space by EADS Astrium.

  • rate this
    +7

    Comment number 24.

    Just because a company is prfitable does not mean it should be able to 'merge' (take over and get access to some cunning technologies, let's be honest about it)...

    This would be dreadful for Britain.

  • rate this
    +1

    Comment number 23.

    13** You assuming we will be in Europe, !! I don't think we will be in 5 years . In terms of importance , defense is behind , healthcare , education , welfare benefits , free bus passes for OAP s etc . We have a demographic time bomb exploding under our feet , with increased year by year costs. As a percentage of GDP, defense will drop by 50% in the next 10 years , civil aircraft use will double

  • rate this
    +16

    Comment number 22.

    I desperately hope this doesn't go ahead. Everytime the British do a joint venture with the French, the French do everything in their power to gain overall control. Airbus started out as a joint enterprise now its almost exclusively French

    I really don't see where the synergies are. I've no doubt this merger has been dreamed up by senior management who would take fat pay off & bonuses.

  • rate this
    +9

    Comment number 21.

    Already being one of the most open economies in the world, why are we so obsessed with being seen as somewhere with no barriers to investment whatsoever? That is not to say foreign investment is a bad thing, quite the opposite, but I don't think any other comparable country would consider letting BAE or say Rolls Royce fall in to foreign hands. But one just knows eventually both will be taken over

  • rate this
    +10

    Comment number 20.

    As a responsible, active shareholder, how would I go about sacking the board? After all, that is the responsibility of the owners.

    When there's occasional talk of making it easier to hire and fire, there should be more focus on the top of organisations.

  • rate this
    -8

    Comment number 19.

    Great idea.

    Let's merge the companies then we can reduce the number of CEO's and non-executive directors surfing along on the coat tails of the workers.

  • rate this
    +7

    Comment number 18.

    Shareholders/board members first, everyone else second.

  • rate this
    +1

    Comment number 17.

    #13 News at 10 says;".. BAE should take over EADS".

    Er, where would the money for this come from?

    EADS is dripping with cash from the deposits lodged on a stupendously large Airbus order book.

    Also, insurmountably, EADS has a Fr, D and Sp Gov't majority holding.

    I've more chance of becoming the next Pope!

  • rate this
    0

    Comment number 16.

    The Defense industry is doomed !! There is no one else to fight , at one time there was money to be made from a war , by either protecting existing trade or nicking some else's. Afghanistan could be the LAST ground lead operation in the next 50 years if ever . Look at Iran on its knees without a shot being fired..

  • rate this
    -1

    Comment number 15.

    These sort of companies manage to undertake joint ventures on large projects (Concorde, Tornado, Typhoon), which can suit quite well, with the structure of each JV reflecting the specific politics of the project. So not in any way the end of the european defence / aviation industry.

    Meanwhile, week two of WW3 and the world mysteriously seems to carry on regardless.......funny that?

  • rate this
    -1

    Comment number 14.

    It's about time we took a back seat and enjoyed our island status. Do we really need to keep pretending we are a global power?

  • rate this
    +2

    Comment number 13.

    @4 hughesz

    "I don't think they will be around in 10 years . British Management strikes again"

    That impossible because defence is actually allowed state aid under EU rules, thats why it makes no sense for BAE to be taken over by a european or american firm, if they're is a problem the government should give money to bae to invest in other area's,change management etc, BAE should take over EADS.

  • rate this
    +16

    Comment number 12.

    Fertile ground for another gigantic buisness cock up, stitch up of BAE, a sell out & loss of UK jobs or all of these options

  • rate this
    +2

    Comment number 11.

    7**

    That is the issue between Afgan and Iraq , it's cost the USA £2 trillion pound , double the total UK total debt . The USA debt mountain can't keep expanding . BIG CUTS are coming and defense will be the No 1 Target . It will be a MINIMUM 25% cut ...

  • rate this
    +3

    Comment number 10.

    So UKGov is unhappy with the foreign ownership of Airbus UK. And whose fault is that foreign ownership other than UKGov and BAe?

    Beyond that, 60:40 looks a poor deal, as does HO outside the UK, but what can you expect?

  • rate this
    +19

    Comment number 9.

    Before we start waxing lyrical about European cooperation and industrial giants to compete etc, can we remember what happened to Racal when it was merged to form Thales - the UK factories no longer exist in a meaningful form.
    The answer should be NO, followed by sacking the directors who seem more interested in their merger bonuses, than the long term future, they sold the BA stake in Airbus.

  • rate this
    +3

    Comment number 8.

    Ufortunately the kiss of death for BAE was selling their 20% stake in Airbus to go on a defence business purchasing spree in the U.S. The result of failure in this merger will be a sell off of BAE's U.S businesses to produce a leaner, fitter - but smaller - BAE, minus its huge pension debt,or a merger with a 2nd tier U.S DoD prime supplier (e.g. Northrop Grumman) to placate a rattled U.S DoD.

  • rate this
    -2

    Comment number 7.

    War's are bummers,
    Warmongers don't need planes as drones invade sovereign airspace illegally for their blood shedding

 

Page 8 of 9

 

Features

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.