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
    +1

    Comment number 166.

    #JFH I'll say it agian THALES are bleeding the UK defence sector dry and keeping french jobs afloat because they cannot make redundancies in france so they have been making them over in the UK and pulling any work that they can back to france.

  • rate this
    0

    Comment number 165.

    EADS is certainly not a commercial company. It is apuppet of the French and German states. The trouble is these states dont have any significant defence related business to throw at them at the moment.
    EADS defence business is hugely over staffed and this cannot be corrected because of the power of the workers councils.
    This is making the company uncompetitive in winning new business.

  • rate this
    0

    Comment number 164.

    @159 John_from_Hendon - Can you state 3 examples of where a merger has led to more jobs?
    The very business case for a merger pivots on the savings to be made from rationalisation of people and facilities.
    Mergers are about acquiring another companies order portfolio, and benefit business leaders, almost to the exclusion of all others, frequently by means of large golden goodbyes, or more power.

  • rate this
    +1

    Comment number 163.

    Thales are bleeding the UK operatins dry whilst keeping there home france afloat with UK profits

  • rate this
    0

    Comment number 162.

    market price discovery MARKET PRICE DISCOVERY, HOW MUCH IS IT WORTH TO THE PRVATE SHAREHOLDERS,

  • rate this
    0

    Comment number 161.

    159.JFH

    Why to you say US influence when in reality it is a very small group called "the atlantic group".A group what still lives in the past
    and of Europe thinks as a group of 3 equals ( France,UK,West Germany ) loyal only to the US.When in reality the world is totally changed now.
    Germany looks east,France to the South etc.T.Enders knows BAE as Defence Contractor and the strength and weaknesses

  • rate this
    0

    Comment number 160.

    159. John_from_Hendon or should we call you Red Herring?

    Sorry you don't get it. EADS is not a commercial company which operates with relative independence of government. Even their CEO is desperate to have a proper job as opposed to being a fonctionaire. Listen to what Tom Enders of EADS wants.
    +
    Greatly diluted returns for shareholders (that means you and me through pension & mutual funds).

  • rate this
    0

    Comment number 159.

    To those that believe that stopping the economically sensible merger will somehow give the UK more power. You are completely wrong as the BAE are essentially under the USA's influence not our at present.

    If you hate our neighbours and friends so much that you are willing to hurt the UK then stick to your bigoted ideas, if not please look at the facts.

  • rate this
    0

    Comment number 158.

    Once again Boards spend millions of shareholders' money on an ill-thought out merger/take-over. Shades of RSA and their hubristic moves East. Surely any moderately competent board could have predicted these problems before they started and ascertained whether there was support to overcome them before committing lots of money to a doomed venture. Someone should be sacked!

  • rate this
    -2

    Comment number 157.

    In whom we trust

    Muttering for The People

    BBC tired of telling, facts over heads

    Easier on Big Business choice in Germany pre-WII

    Today politics ahead of most savage satire, Phoney Wars intensifying: Anti-Progressive Austerity against Mock-Progressive Taxation at home; shallow claims of Democratic Motivation abroad

    UK fears Europe in EADS, US fears China in telecom

    Trust only Purest Greed?

  • rate this
    +1

    Comment number 156.

    , No, no, no, no, no, no, no.......

    ......the banks became too big to fail when there were too many mergers allowed in the financial sector......& look where that got us......

    .....we need to stop this trend towards big private companies who become so big we, the tax payer, have to pay for their mistakes.....

  • rate this
    0

    Comment number 155.

    "Is the BAE/EADS merger a dead duck?"

    http://www.youtube.com/watch?v=LyPFQKpRnd0

    Yup.

  • rate this
    0

    Comment number 154.

    153. frenchliving
    +++
    International Trade is just a cover for bad employment practices, better to keep it closer to home where it can be regulated.

  • rate this
    +1

    Comment number 153.

    152.Name Number 6

    It is unwise to put all your eggs in one basket or in this case too many of them in the EU basket. Much wiser to spread your trade across a large number of economies using different currencies and in different positions in their economic cycles. Call it risk adjustment using good asset allocation. I am glad you are not my financial adviser LOL.

  • rate this
    -1

    Comment number 152.

    151. frenchliving
    hey got sucked in badly so that some 47% of trade is with the EU
    +++
    Whats wrong with that?

  • rate this
    0

    Comment number 151.

    146. Stuart Wilson

    Yes economically screwed and like the U.K. and U.S are engaged in currency manipulation. The great shame for the U.K. is they did not promote a balanced trading portfolio with the rest of the world. They got sucked in badly so that some 47% of trade is with the EU. BAe earns a lot of dollars for HMG and they should not forget that. EADS is a Dutch company by the way.

  • rate this
    -1

    Comment number 150.

    BEADS.

    Just say NO!

  • rate this
    +1

    Comment number 149.

    @130.austriacus
    "Patriotism overcomes economies of scale..."

    Patriotism results in greater production efficiency/lower costs and economies of scale is the last refuge of the scoundrel.

  • rate this
    0

    Comment number 148.

    In simple terms it comes down to industrial reciprocity as free markets only work if all play the game. The politicians in the U.K. of all shades are invariably clueless about industrial strategy. They have not got one. Cameron is terrified of EADS closing plants around the time of the next election and has been trapped. Hollande will pressure EADS for his own needs regarding unemployment.

  • rate this
    0

    Comment number 147.

    145. News at 10
    +++
    Yogurt is immensely culturally important to the French, as a major food producer they quite rightly blocked the takeover, I doubt very much they would be bother about a mickey Mouse engineering company.

 

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