How Germany killed the merger of BAE and EADS

 
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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 Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +1

    Comment number 41.

    The battle of BAE/EADS is over

    The battle of EUROPE (exit) now begins

    The Germans have made there position clear it there national interest first second and ALWAYS. (as well as France) if they cannot do it via state aided free markets they will do it via direct state intervention.

  • rate this
    +15

    Comment number 40.

    If Cameron & Co are serious about rebalancing the economy they need to understand that laissez faire isn't always the best policy when considering the core of our industrial competancy. Look at the mess we are in with building power stations.

    Boards are apt to make deals which financially benefit them personally, not necessarily what is good for shareholders or the country.

  • rate this
    +10

    Comment number 39.

    The proposed merger would be strategic, according to military-based BAE, given them balance by adding EADS commercial interests. Perhaps BAE could advise how their long-term thinking embraced their sale of the commercial wing-making arm to EADS only a few years ago. What a set of plonkers.

  • rate this
    +2

    Comment number 38.

    Embarassing Farce.

    Managing US FOCI (Foreign Ownership Control & Influence) concerns is a fundamental issue for potential prime contractors of US Defence contracts.

    EADS, BAe and UK Gov't all knew that 9% FOCI, and no foreign Gov't appointees to Main Board of is a red line.

    Can't understand why the German Gov't were not sounded out via diplomatic channels before intial announcement

  • rate this
    0

    Comment number 37.

    15.bs44

    Ideally but those would never "get off the ground" without guaranteed (specialy commissioned) custom, at least for the first batch, and money-up-front contracts.

    Who are these customers, both on civil and military projects? National governments! Often, the up front costs are paid then politicains put the project on hold indefinately whilst still paying retainers.

    Pork!

  • rate this
    0

    Comment number 36.

    So hopefully now as many government (and private) contracts for the UK's public and military transport and defence systems will go to BAE and the multitude of spin-off and supporting UK based companies.

    Only by keeping the managerial control and expertise in the UK will we ever get ourselves out of this recession.

    Of course France and Germany would love to have control - you know why don't you..

  • rate this
    +4

    Comment number 35.

    30.goenzoy

    There are still various hi tec processes that despite all their export might China doesn't do which BAE does. As for Brazil & their support for the Argies over the Falklands - doesn't automatically mean that they wouldn't buy British defence kit. In the Falklands war the Argies had mostly French made kit. Lets be clear, if we don't sell to emerging markets then someone else will.

  • rate this
    0

    Comment number 34.

    BAE is a good company potentially, led by donkeys. The current board should be sacked and replaced, they are not fit for purpose. BAE should get heavily into airships.and produce cheaper 'lite' versions of its military planes.which are often (at MOD insistence) over-complex and too expensive for the major export markets around the world. The same is true of its warships. Need US civil partner.

  • rate this
    0

    Comment number 33.

    BAE is a good business and it would be a disaster to be hamstrung by the nationalistic politics of France and Germany. Also BAE is an efficient and profitable business - EADS is not and is dependent on Airbus which is a lower margin business that may seem good today but within 5 years once the Chinese , India and Brazil develop their civil aviation the market will get much tougher.

  • rate this
    +14

    Comment number 32.

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

    The non tactful explanation is that ultimately despite all the propaganda to the contrary national interest takes precedence over European integration. Britain's attitude to ownership of key industries is one of don't care who owns it in the private sector. France /Germany the exact opp.

  • rate this
    0

    Comment number 31.

    I recall us facing French made missiles in the Falklands conflict. How would that be handled if that French company were part UK owned? We could end up in similar or reverse situations in the future leading to huge conflicts of interest. It was just setting up for one big mess...

  • rate this
    -1

    Comment number 30.

    24.
    Walt78

    Dream ON .China is a defence exporter and Brazils defence minister just supported Argentina of the Falklands.
    http://en.mercopress.com/falkland-islands. So both countries are very unlikely destination for BIG BAE defence deals.

  • rate this
    -1

    Comment number 29.

    MARKET PRICE DISCOVERY RULES no big commisions
    FOR THE CITY
    britain safe from foreign involvement a result bring on the USA

  • rate this
    +1

    Comment number 28.

    The articles seem to place the fault entirely on Germany. From what we have been reading over the past few weeks it has been the UK protecting American interests more so than its own.
    BAE is the lesser of the two and would have benefited greatly from this merger, it is a shame to see that politics wins over business sense. EADS in Britain has 14,000 direct employees, compared to BAE's 3,600...

  • rate this
    +2

    Comment number 27.

    Can't agree more with 19. The trouble always seems to be that the FTSE100 companies think short term, looking to maximise shareholder return in the next 6 months or year or two. The UK government needs to learn the lesson from the French and now the Germans on how to recognise and assert its strategic interests before permitting home-base companies to be taken over by foreign competitors.

  • rate this
    -1

    Comment number 26.

    Excellent news. You could imagine at some future point the UK having to get permission to use EADS arms and some country like Russia or China leaning heavily on Germany/France not to supply us. Already we do not build vehicles to transport our forces, at least now we wont have to "import" all our materials (even if they were made in UK, the "profits" would be exported back to Europe)

  • rate this
    +2

    Comment number 25.

    This may be a good thing for BAE.

    Why hitch itself to politically-driven continental industries, epecially when those politics are likely to be anti-UK in flavour? BAE is based in the EU's most open economy, outside the sinking ship of the Eurozone with its navel-gazing politics and over-dependence on Germany.

    I wish BAE the best going forward - it's a rare, world-class UK institution.

  • rate this
    +11

    Comment number 24.

    BAE has a huge future. Rising economies like India, China and Brazil will be spending billions on defence kit over the coming years as "traditional markets" in the West decline due to cuts and reduced military spend. BAE needs to focus on securing these new key markets and forget about this merger, it doesn't need it & we certainly don't need the French or the Germans calling the shots.

  • rate this
    +9

    Comment number 23.

    The difference between direct state subsidy of industry French or German style, and massive bailouts (the massive defence budget of the USA is one huge non stop bail out) for corporations, is what exactly?

  • rate this
    0

    Comment number 22.

    Never mind the economics: it was the Airbus football team that BAE were after. And who wouldn't want season tickets to the Welsh Premiership? No wonder the Germans wouldn't let them go.

 

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