How Germany killed the merger of BAE and EADS

 
RAF's advanced Typhoon fighter jet

Here is the tactful statement from BAE Systems and EADS explaining why they have buried their plans to merge:

"Notwithstanding a great deal of constructive and professional engagement with the respective governments over recent weeks, it has become clear that the interests of the parties' government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger."

Here is a translation of all that by a source close to the two companies: "it turns out that the German government is fundamentally opposed to the deal, and there was no way we could get round that."

You will presumably recall from my earlier notes on all this (poor you) that the boards of EADS and BAE made it a condition of the £28bn marriage going ahead that France and Germany should limit their ownership and control of the enlarged company.

Which is why pretty much everyone believed it would be France - with its statist and interventionist penchant - which would blow up the transaction.

But as it turned out, the German government was just as unrelaxed about allowing EADS - owner of Airbus and therefore a strategically important manufacturer - to run itself in an arms-length and commercial way.

Once German intransigence became clear - as it did overnight (see my post of yesterday evening) - EADS and BAE had no option but to call the whole thing off.

The point is that BAE's biggest customer is not the British government but the US government. And there was no way that the Pentagon would continue to classify BAE as a privileged supplier of sensitive technology if it felt that the company was somehow under the sway of two foreign governments - even governments, in the form of France and Germany, regarded as allies.

BBC Business editor Robert Peston: "The German government's opposition stopped the deal"

Anyway, there is a whole super-jumbo airliner full of paradoxes about the way this deal was both negotiated and the way it fell apart. Here are some of them, in no particular order.

First, the boss of EADS, whose corporate dreams have been squished by Angela Merkel and co, is a German ex-paratrooper. He's been mugged by his own compatriots.

Second, BAE's owners, as opposed to its board, aren't weeping about the collapse of the deal. Many of them - led by BAE's largest owner, Invesco Perpetual, with 13.3% of the company - had strong reservations about it.

Third, the rationale for BAE's board for the deal was that it would cushion it from severe recession in the defence industry, caused by cuts in military spending by over-indebted governments, such as those of the US and UK. But if only BAE had not sold its 20% stake in Airbus in 2006, it would not be so exposed to the capriciousness of ministers deciding what to spend on jets, military vehicles and bombs.

In fact the reason the merger had the support of the UK government is that the British prime minister is profoundly unrelaxed that Airbus UK, maker of wings for the eponymous airplanes and supporter of 140,000 hi-tech jobs in Britain, is wholly owned by EADS, and is therefore in effect controlled by the French, German and Spanish governments (which have a concert-party agreement or owners' pact in relation to 50.5% of EADS's shares).

So although the merger of EADS and BAE collapsed because the German government was not prepared to let go of the enlarged business, the fact that Germany is not prepared to give EADS its commercial freedom is of relevance to the UK's manufacturing future - at a time when Britain would be seen to have far too few hi-tech manufacturing jobs.

UPDATE 15:20 BST

I have just spoken to the chairman and chief executive of BAE, Dick Olver and Ian King respectively.

They say that they had their "red lines" in respect of future relations with the French and German governments, and therefore had no choice but to drop the merger, when negotiations with Germany in particular become more fraught.

According to Mr King, Germany became "more intransigent about issues than anyone would have believed".

Interestingly, although formal agreement on the crucial issues had not been reached with France either, Paris was behaving in a more constructive way than Berlin.

In simplified terms, what mattered to BAE - and to EADS - was that France and Germany would agree to limit their ownership and control of the enlarged business (and see my earlier note for why this was a commercial imperative for BAE).

Will they attempt to revive the merger at some future date? That is not in their minds right now.

But if Berlin and Paris at some point - and of their own accord - make it clear that their opposition to the transaction has abated, BAE and EADS would then have another go.

I would say that the mood of BAE's two top people was one of tiredness, but they were not demoralised.

Although BAE faces huge challenges, because of the squeeze in US and UK defence budgets, they believe their other international operations are in good shape - and they are positive about their small civil businesses.

That said, there will be a few months of unsettling uncertainty for BAE, as its biggest customer, the US government (which contributes 40% of BAE's revenues) goes through the presidential election and then an ensuing debate until the middle of next year about the future size and shape of American defence spending.

Will BAE be vulnerable in that period to an opportunistic bid from one of its US rivals, such as Lockheed? Maybe. But British government sources have told me that such a takeover would be unwelcome and it would use its "golden" share in BAE - which gives it special powers - to block any such deal.

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

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  • rate this
    -5

    Comment number 21.

    I blame the French.

  • Comment number 20.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +24

    Comment number 19.

    Same Old, Same Old!!
    Yet another British company looking at the very short term again and getting it wrong. Only six years ago they owned 20% of Airbus and flogged it to EADS to buy Marconi. Time for a change at the top, take a leaf out of the German way and invest for the long term not just for a quick buck return.

  • rate this
    0

    Comment number 18.

    'German and 'intransigence'. Two words which will soon be synonymous.

  • rate this
    -3

    Comment number 17.

    Glad to know that I hit a nerve, stating the obvious is a sure way to be down rated. It asks as much hypocrisy as this column author in blaming the German for putting an end to weeks of British whining, where the underdog in a deal was arrogantly setting its highly political preconditions on others all while asking them not to do so.

  • rate this
    +3

    Comment number 16.

    The germans at it again,have they not learned their lesson, they have no part in owning our defence company or having the new HQ in their country.

    BAE needs exports and better management, it does not need to be taken over by american or european firms, UK is allowed to give state aid to defence n should do if BAE needs it.

    Billion pound subs n ships are a lot more difficult to make than a plane

  • rate this
    +1

    Comment number 15.

    11. CO
    I posted on this a couple of days ago, saying that these companies tend to manage the politics by creating specific JVs for big projects (Concorde, Tornado, Eurofighter). This can actually work well, as the JV will mirror and be tailored to the actual project (e.g. if UK plans to buy 50% of Concordes then they control 50%).
    So no reason why that can't continue.

  • rate this
    0

    Comment number 14.

    The deal might be on the table again in case there is a change in government in Germany. The German metal workers union was very much supporting the deal, but they are not best friends with the current government. And as for the state ownership of businesses - it's not just a French phenomenon, Lower Saxony, one of the German Länder, still owns about 20% of Volkswagen.

  • rate this
    +1

    Comment number 13.

    A relief that it has failed, the political unreliability of the French, and the German position, resulting in the loss of confidence in BAe by the US DOD, would have been a disaster, the loss of independence outweighing the notional benefits being touted. Plenty of mistakes made by BAe over the years, but this would have made it worse for the country, not better.

  • rate this
    0

    Comment number 12.

    Judging by the share price changes after the deal was off it is obvious that the EADS group are well out of it. It was in BAE's interest only, as they can see a dim future on their own. Why did they sell their share in EADS -for a quick profit. They are much more interested in cosying up to the Americans than Europe. Maybe one of the big US defence firms will swallow them up. They deserve it.

  • rate this
    +1

    Comment number 11.

    This is bad news for British taxpayers.

    BAE is shortly in for a kicking as military budgets get slashed, but this is an essential national industry.

    Expect huge sums of public money to be poured into this "private" business to keep it afloat. More corporate socialism/cronyism. And more welfare cuts to pay to it no doubt.

    Too Big To Fail? Lessons learnt?

  • rate this
    +2

    Comment number 10.

    Oh dear, seems as though the Board of BAE should have considered several of these rather obvious obstacles before embarking on this wasteful and some might argue egotistical process. Time for the owners of the business to look at a new Board of Directors perhaps.

  • rate this
    -16

    Comment number 9.

    Great, the whining Britons -both the gov with its 'golden share' and the highly politicized 'stakeholders' wishing that the defense part should be located on their tiny island, among others 'no meddling unless it is our' hypocrisies- were too ludicrous and annoying to bear: let BAE rot, EADS is fat better without it.

  • rate this
    +3

    Comment number 8.

    It is interesting from Robert's report that it was Germany that blocked the deal not to lose their national influence. The UK Government would have let the deal go through had ownership been private sector dominated. Interesting set of political priorities...and remind me which country is the more successful manufacturing and exporting nation?

  • rate this
    +12

    Comment number 7.

    Perhaps if the UK government care about its workforce as much as the French or German governments, then we wouldn't be in such a mess. I totally understand the stand of the French and Germans who don't want such an integral part of their industry to be privatised. If we hadn't sold our soul to the devil years ago, then we could just join this collaboration!

  • rate this
    +1

    Comment number 6.

    "Once German intransigence became clear"

    ===

    It seems to me the intransigence was equally on the part of the respective boards.

  • rate this
    -1

    Comment number 5.

    Sounds more like damage control from the British side to me.

    Not all countries have such a blasé attitude to their stakes in key companies as you Brits.

  • rate this
    +2

    Comment number 4.

    And the tens (or hundreds) of millions of pounds/euros paid to the "advising" investment banks will be refunded in full, of course?

    I didn't think so; they had no possible inkling of that issue appearing out of nowhere.....

  • rate this
    +23

    Comment number 3.

    Some governments care about keeping manufacturing and manufacturing-support jobs and know-how at home.

    Other governments care about selling the crown-jewels of their country for peanuts so that their higly paid CxO old-boys-network buddies get rewarded immediatly and they themselves can later retire to cozy sinecures.

    I'll leave it to the reader to figure out which is which.

  • rate this
    +1

    Comment number 2.

    Re BAE sale of Airbus stake in 2006 and PM's keenness on proposed deal: horse, stable door and total failure to apply bolt even after the event come to mind.

 

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