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

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  • rate this

    Comment number 46.

    Just before WW1, the clowns in the MoD were banging their cost saving drum to move production of ship propellors from Britain, because it was GERMANY! The Navy stopped them, fortunately. Civil Servants are still at it, flogging off National Security assets, BAE is such an asset. Someone should get a grip of the "not fit for purpose" 'servants' and BAE directors, and stop them now!

  • rate this

    Comment number 45.

    Being frivolous. BAE could take over EADS, have HQ in the U.K. and close the european factories. A strategy I'm sure the the French and Germans will be pleased to support.

  • rate this

    Comment number 44.

    still if does not go a head lots of brokers diving to the canals of birmgham i suppose,that and less bonuses for the city happy days,less corporation tax and all that for the exchequer,not happy day,more cuts to something at lower tier of the food chain looks like we are to win\lose situation

  • rate this

    Comment number 43.

    National defence is a waste of money. So much of our stategic industries have been sold abroad that a foreign power can take over simply by refusing to sell us anything.

  • rate this

    Comment number 42.

    BAE will be selling shed loads of replacement parts to the good old u.s.and.a not long after mad mitt wrongney gets elected and starts a war in the middle east. ergo. lots more profit in keeping the status quo.

  • rate this

    Comment number 41.

    HQ in Munich
    Part owned by Germany and France.
    Job losses in Britain.
    Decisions made by Germany and France in majority.
    Britain's defence capability hog tied.
    What part of this is good fro Britain?

  • rate this

    Comment number 40.

    i suppose the real point of debate is
    do they need us
    more than we need them
    if the they need us then they should treat us ok
    but if they do not need us then they must be trying to get rid of us
    if need us do they need us all or just a few chosen ones
    i get the feeling they need just a few chosen ones
    the rest of us a surplus to there requirement
    so it is EASY peasy lemon squeazy

  • rate this

    Comment number 39.

    Cameron had large-scale revolt when 45 Conservative MPs signed a letter DEMANDING PM veto planned €35B BAE/EADS deal. France & Germany want stakes of at least 9% each. Cameron cannot meet MPs’ demands new company have no state shareholdings. MPs: "Without some vital safeguards, we do not think that this deal will be in the UK’s national nor manufacturing interest.”
    Dead duck pucked.

  • rate this

    Comment number 38.

    BAE is vital to UK defence.

    It could be undermined by political considerations. EADS wants to break into the US market so having got BAE's address book, it could ditch BAE.

    It would risk losing US collaboration and the combined company would be worth < the individual companies.

    The boards of both companies should consider their positions.

  • rate this

    Comment number 37.

    I'm not sure if I'm all that bothered, the British don't own anything else anymore so why bother stopping this. All our energy supply etc is foreign owned now.

  • rate this

    Comment number 36.

    We always come back to what is in it for the over zealous directors of these companies whenever these mergers, takeovers call them what you like we have to ask what's in it for the directors I don't think an increase in philanthropists will be the outcome

  • rate this

    Comment number 35.

    If its about shareholder value then selling out to the French & Germans is a disaster not that doing a deal with the US would be any better. BAE should remain independent from EADS these huge deals result in mass lay-offs and I bet the UK comes off worst this government keeps crowing about jobs in manufacturing but shows no action at all.

  • rate this

    Comment number 34.

    It's sad that our aerospace industry has been frittered away by successive governments but surely the future does not lie in becoming a US puppet state (particularly if Mad Mitt Romney gets in)? BAe has always been on the sidelines of European aerospace and a true merger would help keep some initiative closer to home. Modern aeroplanes need modern finance and that won't come from being British.

  • rate this

    Comment number 33.

    Who is the potential enemy? Is it USA or France? Or is it more likely that a threat to western democracy will come from Russia/Pakistan/China/Iran? So, where does the UK's national interest lie? Where is the strategic thinking? As usual, this is all driven by the shortest term commercial interests of the senior management/directors of the organisations involved. Something wrong here? Fortress UK?

  • rate this

    Comment number 32.

    No. A more complicated and unneeded merger you couldn't invent.

  • rate this

    Comment number 31.

    Is there really nobody apart from the boards of the two companies in love with the idea of this merger?
    Robert, you've just said a mouthful!
    I submit that mergers are usually:
    Bad for staff, leading to consolidation, lay-offs, increased workload and cultural assimilation
    Bad for customers, often degrading service
    In recent years some have even been bad for shareholders in the long run (or sooner)

  • rate this

    Comment number 30.

    26.News at 10, even if the UK gov't would print and hand over the >£50bn needed BAE to pitch a massively cheeky "smaller buys bigger" deal, you ignore my slam dunk point...

    That the majority direct/indirect holding of French, German and Spanish gov'ts would kill the deal stone dead - it wouldn't even be dead on its perch.

  • rate this

    Comment number 29.

    The refurbishment program for the Army's AICVs was handed to a US firm, the contract for the Army's new light tank went to a US firm.
    The government is objecting to the merger because the US DoD won't like it and Europhobes on HYS accuse the French of wanting to control everything!

  • rate this

    Comment number 28.

    There is clearly a conflict of interests.

    This makes no strategic sense for Britain, both in terms of maintaining industrial competency or our strategic defence needs.

    This merger has everything to do with senior managers selling out, either take up higher paying roles in the merged company or receiving big pay offs.

  • rate this

    Comment number 27.

    Franco-German enthusiasm for this deal (even thought heavily muted to avoid spoiling it's chances) should be a pretty obvious sign indicating which economies would be the winners if this goes through "as is".
    Rasing concerns about our military secrets is a sham - pretty much everything of significance is known about by our US chums (via QinetiQ). Nothing of crucial interest to the septics will go.


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