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

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  • rate this
    +2

    Comment number 106.

    Thank God the Americans will probably stuff this takeover anyway. I can't see American retired Generals and ex-CIA directors in the management of BAe Inc taking their orders from Grand ecole politicos with runny noses and pimples because that will become their reality. By now a few of them have probably woken up and called some mates down at Northrup. It is the obvious partner.

  • rate this
    -1

    Comment number 105.

    "krokodil
    Would the French let foreign Governments have any say in it?
    It's a good idea to keep certain industries sacred.'

    For which the French pay much higher taxes and have, over the past few decades, had lower growth.

  • rate this
    0

    Comment number 104.

    they could call it BEADS

  • rate this
    +2

    Comment number 103.

    The U.K. has allowed infiltration of so many sectors that it can be blackmailed at will by France and Germany on most industrial issues. Try buying EADS in a reverse takeover or Dassault even - laughable. EADS is quite easily affordable if BAe asked in the right places for the money to buy it.

    98.
    News at 10 Exactly so why not have the better management?

    93.
    Dragonwight The French afford it?

  • rate this
    0

    Comment number 102.

    94.krokodil

    A major British company? BAE Systems are a multinational, with more than half of their assets in The US. Just 40 percent of their workforce is in the UK and make up only 0.2% of the total British workforce. If they went bust tomorrow, we'd barely notice it, except that our armed forces may just start getting cheaper kit that actually works

  • rate this
    +6

    Comment number 101.

    France has Dassault. It makes its warplanes and systems.

    Would the French let foreign Governments have any say in it?

    After they stopped laughing at the idea, they would say a firm NON.

    It's a good idea to keep certain industries sacred.

  • rate this
    +2

    Comment number 100.

    @97. frenchliving "...perhaps you did not notice the new Cuba without sunshine across the channel."

    It's not just over there. Did you hear BBC radio news today only giving airtime to a guy in favour of this deal? The BBC are pushing this - their loyalty is suspect.

    Waive your above-the-law status and let the JS inquiry be external, not an internal whitewash, BBC!

  • rate this
    +2

    Comment number 99.

    Many years ago, BAe made a strategic decision to run in the U.S. It has done incredibly well considering it is not an American business per se. Are the BAe management now saying they have no ideas on how to become the 3rd or 2nd largest supplier in the world's largest defense market? If they don't, then fire that management and get one that knows what it is doing.

  • rate this
    +3

    Comment number 98.

    EADS is the bigger company yet both make the same profits, seems to me BAE is the leener more cash generating business and that's without BAE winning foreign contracts, now if BAE could win export orders for it's naval and submarine business aswell as other areas things would get even better.

    60/40 towards EADS is a joke considering how much growth potential is left for BAE.

  • rate this
    +3

    Comment number 97.

    Having an intimate knowledge of business in the U.S, U.K. and Europe, I can tell you that this is a classic black mail. Permit a BAe takeover or jobs from EADS plants in the U.K. will disappear. Otherwise, no Prime minister would even entertain the idea. Financially, BAe doesn't need EADS but they need BAe earnings - perhaps you did not notice the new Cuba without sunshine across the channel.

  • rate this
    +2

    Comment number 96.

    This would be a DISASTER for Britain if it goes ahead in *any* form.

    (Did I not read here earlier that our UK Govt has a "Golden Share" - a Veto over any such deal? Can't see it now, has that been edited-out?)

  • rate this
    +4

    Comment number 95.

    The tie up is bad for Britain. With mergers come cost cutting through intergration, the culling of duplicate jobs etc. As both Germany & France both have much tighter employment laws than we do here in the UK, making it much more difficult to make redundancies in those countries, then you do not need an aerospace degree in rocket science to work out where the jobs will be lost

  • rate this
    +5

    Comment number 94.

    Would I want a major British company coming under French and German political influence?

    No thanks.

  • rate this
    -2

    Comment number 93.

    Defence is a shrinking market which is set to shrink a whole lot more, i suspect BAE see this tie up as a way to stem the flow they already work closely with EADS on a number of projects anyway. If its not EADS it will be someone. A country with 19 warships and a few planes and subs doesnt generate enough work to justify keeping a state interest nor can we afford to.

  • rate this
    +5

    Comment number 92.

    Babes unborn.

    Lambs to the slaughter.

    Like Qiniteq before.

    Simply to be sold off. For whose benefit ask yourself.

    Somebody is cashing in. And it isn't the UK taxpayers.

  • rate this
    +3

    Comment number 91.

    #89 normally I like what yo usay ut on this issue you are wya wide of the mark.

    the french and german will see that jobs stay in there countires.

    UK was a world leader in Fly by wire in mid 80 which is why we did Active tech Jaguar and then EAP others wanted no part until EFA came alone now the germans have it. QED

  • rate this
    -6

    Comment number 90.

    If BAE doesn't get this deal then BAE is a dead duck
    It needs to happen now, while the company is relatively strong

    Otherwise it will happen anyway in 10-20 years, when BAE is a shadow of todays company

  • rate this
    -15

    Comment number 89.

    We and the companies need this deal.

    This deal is good for the UK and good for Europe and will create a company that can better compete with Boeing etc.

    If this deal is scuppered it will be wrecked by the far right Little Englanders of the Tory Party and that is where all the rumour is originating about this deal. They are a menace to the country and to Cameron. They create conflict and wars!

  • rate this
    +11

    Comment number 88.

    This merger is the most stupid thing I've heard proposed outside of Political Conferences this year. The BAE Chief tryes to go ahead with it, without even consulting the major shareholders. This is an essential business that holds a privileged position in the market place. This is blatant self-serving by the management, as usual. They need to be stopped, even dismissed if necessary.

  • rate this
    +7

    Comment number 87.

    At the end of the day it's common sense for every country to have a independent defence business, sure we get along with germany n france now but it was only 60years ago we had world wars n a cold war,alot can change in another 50-60years but hopefully not and what rule is there in place to say we will always be allies with america.

    Alot of spin offs come from defence like health,space,nuclear.

 

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