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
    0

    Comment number 201.

    probably a naive thought (waiting for abuse now), but isn't the EU supposed to be a free market? It can never be that it if some sovereign governments are messing around with state ownership of industries. Whether this deal was good plan or not is a different question. EU governments claiming to support EU yet owning significant shares in businesses in the so-called single market, laughable.

  • rate this
    +1

    Comment number 200.

    "How Germany killed the merger of BAE and EADS"
    ~
    Don't believe this garbage. The US didn't want it, and the UK does as it's told, and so made the terms of the deal impossible for the other parties to agree. Simples.

  • rate this
    0

    Comment number 199.

    If Hitler had been able to make a business case to FDR, we'd all be speaking German now; the bottom line is all that matters.

  • rate this
    0

    Comment number 198.

    Am I being a bit little England in thinking this smacks more of the power of the US, or rather Britain's subservience to them, than the power of the German or French governments? The deal fell through because the US wouldn't be able to tell BA what it would be allowed to build?

  • rate this
    +1

    Comment number 197.

    Germany & others killed the deal with 'protectionism'.

    Contrary to what is taboo at the BBC - Germany is one of the foremost countries in the world at practising 'protectionism' in ket areas of its economy and is one of reasons it is doing better than most other countries.

    Well done Germany - Did the UK a favour there

  • rate this
    0

    Comment number 196.

    192. alan
    The Government should take golden shares in other businesses in order to ensure that any foreign takeovers are in the national interest.

    No chance. Vince Cable has said that is comfortable with foreign takeovers of British companies. Funny how our German friends have the opposite view and their German owned and controlled industry leaves us standing. Who has the right policy, I wonder?

  • rate this
    0

    Comment number 195.

    191.pmk

    Yes DARPA is an incredibly successful organisation.

    To be fair though, the internet was a successful platform only because of two 'killer apps', www and email (neither is American). Without those it would've been as successful as minitel!

  • rate this
    +1

    Comment number 194.

    The west is rapidly running out of the money needed to fund wars. There may be less business to be had in the future... there will also be less loss of life. That is not a bad result.

    Military spending needs to be replaced by more skillful politics.

    Jaw-Jaw etc...

  • rate this
    +1

    Comment number 193.

    You got it right again Robert. Good to have you back. Look after yourself.

  • rate this
    +1

    Comment number 192.

    The Government should take golden shares in other businesses in order to ensure that any foreign takeovers are in the national interest.
    Alan

  • rate this
    0

    Comment number 191.

    Comrade Ogilvy: "GPS was developed by the US DoD and put into space by NASA. All public.

    They also have DARPA encouraging innovation and open competition."


    Internet was invented by DARPA (then ARPA) , though some ignorants equate its small part [http nonsence] with it.

    DARPA was behind an effort to create supercomputers, Internet 2
    (pretty soon at 100 Gb/sec) GPS II & Mach 7 planes.

  • rate this
    -1

    Comment number 190.

    REe#187, correcting a typo:

    Pentagon/NASA would NEVER transfer their state of the art technologies to EADS so they'd end up in Beijing and Moscow)

    BAE becoming a part of EADS would find itself in the same predicament.

    Your choice.

  • Comment number 189.

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

  • rate this
    +1

    Comment number 188.

    read this article

    http://news.bbc.co.uk/1/hi/business/the_economy/312860.stm

    you could either laugh or cry either way the response is hysteria.
    who says that past mistakes can be forgotten.
    the awful mismanagement of Marconi.....why are the directors not being held to account

  • rate this
    +1

    Comment number 187.

    BAE had a clear choice: to have an access not only to US contracts, but much more importantly, to the state-of the-art Amercain aerospace technology.

    Or become united with an entity to which Pentagon would transfer any of such technologies.

    Now, which would be better in the long run?

  • rate this
    0

    Comment number 186.

    QE4 Soon Come-Economy requires proper stimulation with lubrication to turn it on and give birth again. How about giving all of us some virtual money for £1,500 which can be traded for real shares on FTSE AIM etc. That we we can all plant our seed and go forth and multiply over time in a long term development plan on planet earth. It would create a massive client list for UK Government Owned Banks

  • rate this
    0

    Comment number 185.

    #139 Stuka

    "We should have let you all go at it in WW2. "

    --Nothing is that simple !

    http://www.ranknfile-ue.org/uen_nastybiz.html

  • rate this
    +1

    Comment number 184.

    So, the bottom line is, our defence firms are slowing slipping into red because of the recession and subsequent defence cuts. So, we need to kick start the need for them... time for a new war, anyone?

  • rate this
    0

    Comment number 183.

    BAe is a high tech co with masses of engineering & science expertise. If they can't produce new products, enter new markets and areas, it may be due to incompetent senior management, the selfish greed of UK finance, or the shortsighted stupidity of UKGov. Take your pick!

  • rate this
    0

    Comment number 182.

    #181 we have to have job and products to sell to the world to finance those services that u so crave , £10b 4 A380 dev and £350B QE instigated by crash gordon & that has been no help , Only signed carriers of at last minute.
    Also labour did not address nulcear issue 4 fear of a nuclear explosion in there ranks

 

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