BAE Systems, EADS end merger discussions

A German vetoed reportedly sinks the potential combination, announced Sept. 12, which would have created the world's leading international aerospace, defense and security group.

BAE Systems (London, U.K.) reported that it and European aerospace manufacturer EADS (Leyde, The Netherlands) have ended discussions about a possible merger. The potential combination, announced Sept. 12 (see related article under "Editor's Picks," at top right), would have created a world-leading international aerospace, defense and security group, employing more than 220,000 people at substantial centers of manufacturing and technology expertise in the U.K., France, Germany, Spain, Australia, India, Saudi Arabia and the U.S.

In an open letter to it’s employees and all stakeholders, dated Oct. 11, BAE chairman Dick Oliver and CEO said the two companies believed the “bold” plan had the potential to offer significant benefits for all stakeholders and offered opportunities greater than the sum of their individual business strategies, which each is executing well. However, they pointed out that, from the outset, the merger posed significant challenges, and that it had been BAE’s position that the new company should “be free from undue political influence” and would need to be one “where all shareholders — big and small,  government and private — enjoyed equal rights whilst at the same time properly safeguarding the national security interests of the various governments involved.” They went on to explain that “despite our best efforts ... we have not been able to achieve that goal.”

BAE's letter came in the wake of widespread news reports that Germany's chancellor Angela Merkel had refused to sign off on the deal. The U.K.-based Guardian reported on Oct 10, information gleaned from "sources close to the deal" who claimed that Merkel's principal objection was that the deal would merge a civil aerosace company with a defense group.

Reports also circulated that the French government objected to Germany's desired to headquarter the merged firm in Munich.

Germany, however, refused to take the blame, citing a U.K./France dispute over the size of the latter's share in the new company. According to Industry Week (Oct 15), the French share in EADS would have dropped from 15 to 9 percent if the deal went through, a percentage theshold insisted on by BAE. The U.K. goverment desired limits on the involvement of European governments in the merged mega-giant, the BBC reported on Oct. 10,) because it sought to preserve BAE's postion with the U.S. Department of  Defense, currently its largest customer (according to the BBC, 40 percent of its business. According to a report the same day by National Public Radio, this was a significant issue for BAE: Any perception that the merged conglomerate was "state-owned" would interfere with BAE's ability to compete for contracts in the U.S. and in Asia. (Few in the competitive world of aerospace defense contract bidding have forgotten the three-year dust-up that ensued when a team composed of lead Northrup Grumman (Falls Church, Va.) and EADS and Airbus (Toulouse, France) went up against competitor The Boeing Co. (Chicago, Ill.) during the U.S. Pentagon's contract competition for the right to build the replacement for the KC-135 air refueling tanker. (See "U.S. DoD to restart KC-X bid process," under "Editor's Picks," at top right.) Boeing has long charged that EADS/Airbus' support from European governments puts bidding teams on unequal footing. Further, Germany pointed to shareholder doubts about the deal, including BAE's largest shareholder (13 percent) Invesco Perpetual, which issued a press release critical of the merger's prospects for BAE.

But a day later, Oct. 12, no less than George Osborne, the U.K.'s chancellor of the exchequer, according to the Financial Times, publicly expressed disappointment in the failure of the talks, taking the Germans to task for issuing a veto when talks might have continued to a more productive conclusion.

The abrupt end of talks leaves open the fate of BAE Systems, which is still in need, by it's own reckoning, of either a merger or a buyout. BAE's Tom Ender was seeking, with merger, to recapture revenue given up when the previous BAE board sold off it's holdings in EADS' aerospace enterprises to pursue contracts within the then lucrative U.S. defense industry. Staring at a whopping $600 billion in defense cuts in the U.S. in the wake of the the wind-down of two war, the BBC reported, BAE saw the EADS merger as a way to stabilize its profit picture and that EADS saw the same benefit for itself.

Potential merger/buy out candidates include U.S. based firms: Lockheed Martin (Bethesda, Md.), General Dynamics (West Falls Church, Va.) and, possibly, Northrop Grumman.

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