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
    +1

    Comment number 61.

    Cameron should also go for giving his support to the prpsal.
    Once again he falls short, an absence of understanding of the need not to allow foreign ownership of our largest manufacturer.
    Hasn't he understood how the French always behave trying to be the boss of joint projects, let alone joint companies.
    Daves time as a 'public relations' consultant hasn't prepared him for much-maybe speeches.

  • rate this
    -1

    Comment number 60.

    This is no more than a proposed takeover. Just as the Franco/German EU seeks to take over everything this is no different. The EU will fold in the future BAE are better off out of it staying British

  • rate this
    0

    Comment number 59.

    #43 JFH agian u disappiont me , I'm no warmonger. The EU will break up and quit soon as this deal demonstrates the Germanswant total control and r not prepared to shar industires where they are not so good as others. Which is why Greece should have never joined the EU. Spain will follow in bit and pieces so will many of the others whether there is blood depends on the politican NOT me.

  • rate this
    +19

    Comment number 58.

    Great News-sack BAE Directors.
    First they get out of a mega major successful enterprise–Airbus, with huge forward orders– cos it might have 5 expensive years ahead, switching most of BAE’s resources to US military market, and then just 6 years later, when that new area cyclically downturns, they try to chase back to Airbus/EADS.
    These BAE boardroom Del Boy 'duckers and divers' should go.

  • rate this
    +3

    Comment number 57.

    One of the interesting snippets to emerge in public was, at one point, a German Government insistence that the corporate headquarters be in Munich. At first glance, this seems deeply irrational. Munich is a bit of a backwater in the context of EADS' core businesses. The implication is that the German partners were nervous about the loss of the Manching facility, and thus German military aerospace.

  • rate this
    +3

    Comment number 56.

    47. Space
    If you take profit after R&D investment then you are right, they are about equal. But last year alone EADS spent nearly £3B in R&D, compared to BAE spend of £1.2B. EADS also has nearly double the operating revenue!
    The near equal profit base can explain the 60-40 split in this proposed merger.
    To be fair it would be interesting to see which company brings more to the UK!

  • rate this
    0

    Comment number 55.

    48.bs44

    " That's the nature of the beast though eh?"

    Mostly but doesn't have to be. GPS was developed by the US DoD and put into space by NASA. All public.

    They also have DARPA encouraging innovation and open competition.

    They also throw pork at the big players, but the US have clearly still got options.

  • rate this
    -1

    Comment number 54.

    #15 true in part BUT the germans have been very underhand in the work share for EFA/Thyoon. They where no where in the FBW EAP and yet have the FW tech on EFA. Also they did not want the DASS on EFA but then changes there mind when no work share then cancelled the DASS agian but had the jobs, would like to see the current actualls

  • rate this
    -1

    Comment number 53.

    The US doesn't want the fed to subsidise a foreign company it cannot control.

    The German government does not want to have to subsidise a company that will, well, need subsidies.

    Bye bye BAE.

    Losing its market. And its lifeline.

    Like the nationalised industries before it.

  • rate this
    +1

    Comment number 52.

    50.Little_Old_Me

    I don't think you have clue about what your are talking about, this about a merger not your hug a tree rants.

    We need defence for protection of our own people plus defence have more spin-offs then any other industry, without developing new weapons we wouldn't have computers, nuclear power, gone to the moon, have a space industry, revolutions in health technology etc.

  • rate this
    +4

    Comment number 51.

    50.Little_Old_Me

    Woooah there, I don't recall saying that we should "sell guns to anyone" & bringing Brevik into this is somewhat hysterical. Of course there should be checks and balances in place and there are, it is a highly regulated business. Taking that as read I was merely making the point that if we don't seek deals in new markets then someone else will step in.

  • rate this
    -10

    Comment number 50.

    35.Walt78 - "......if we don't sell to emerging markets then someone else will."


    And by your logic it was OK for Andres Brevik to kill all those youngsters in Norway because if he hadn't someone would have...???

    Whilst a weapon needs a human to fire it, not having weapons vastly reduces the damage you can do - we shouldn't sell guns to anyone.....it is immoral.....

  • rate this
    +2

    Comment number 49.

    As I recall, the Beecroft report suggested that what it termed "unproductive workers" should lose their right to claim unfair dismissal.

    The least productive workers in most large businesses are the executives. Time to partially implement the recommendations and use BAE as a first case?

  • rate this
    0

    Comment number 48.

    37.CO
    That's the nature of the beast though eh? No companies are big enough to speculatively spend massive amounts on R&D for the massive projects
    we're on about, yanks included.
    A recommended book on the downfall of the post war british aviation industry, charting the decline and merger of the numerous old companies into what we have now, is 'Empire of the Clouds'. Wistful, but a good read.

  • rate this
    +4

    Comment number 47.

    28. TheWelshCJ

    .....BAE is the lesser of the two and would have benefited greatly from this merger.....
    ___

    Yet 'little' BAE makes just as much profit as EADS. It's also amusing that people seem to be saying that BAE owning part of Airbus, will somehow protect British jobs - BAE loves to export our jobs!!! It's actually harder for the French/German governments to do that because of politics!

  • rate this
    0

    Comment number 46.

    The only control the UK government has over BAE is the "Golden Share" to have the final say on takeovers, in all other respects it is a PLC. Eads, on the other hand is in terms of share holding a (dual) nationalised company. That sort of merger wouldn't work. Perhaps Germany and France should sell their stake in EADS. They will need the money soon to buy up more Greek and Spanish bonds

  • rate this
    +1

    Comment number 45.

    44.JfH

    "BAE must now be a target for takeover and splitting up with a huge loss of UK jobs."

    It needs breaking up now whilst things are good so the important stuff can be saved rather than bring the whole edifice down (or needs taxpayer money to prop up).

    states have a right to intervene in market activities in the defence industry. Veto foreign takeovers.

  • rate this
    -2

    Comment number 44.

    BAE must now be a target for takeover and splitting up with a huge loss of UK jobs.

    That is the only path for BAE now

    OR next year when there is a new German Government a renewed merger with EADS on worse terms.

  • rate this
    -10

    Comment number 43.

    41.IR35_SURVIVOR "The battle of EUROPE (exit) now begins"

    Warmonger! The blood of the children will be on your hands.

  • rate this
    +2

    Comment number 42.

    I guess it all depends on your view. If you are a europhile and think the United States of Europe is wonderful then the Germans have been manoeuvered to look like the baddies. If you are not a europhile then German government look like the ones with backbone. Either way good news.

 

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