EADS Chief Underestimated Berlin as BAE Merger Fails

European Aeronautic, Defence & Space Co. (EAD) Chief Executive Officer Tom Enders said he underestimated political opposition to a combination with BAE Systems Plc (BA/) and vowed to review strategy after talks collapsed.

Enders, who is German, singled out Angela Merkel’s government as the stumbling block that contributed most to the merger’s downfall, saying in a letter to employees that “I’m ready to admit that we never expected to face such opposition against the deal, in particular not in Berlin.”

Merkel expressed her opposition to a deal in a phone call with French President Francois Hollande, according to a person with knowledge of the talks, who asked not to be identified because the conversation was private. German lawmakers had shown growing reservations about the combination since it became public, criticizing Enders for a lack of detail on his plans and that EADS should own a larger chunk of the combined company.

By contrast, Enders applauded the “strong efforts” by the French and U.K. governments to overcome an impasse, which ultimately proved futile as the deal collapsed yesterday with just hours left to produce a merger document or seek more time for an accord. Enders, calling the failed deal “unfortunate” and an “opportunity lost,” said he’d learnt a “number of lessons.”

“We will need to review our group strategy and defense activities in particular,” Enders wrote in the letter, which was obtained by Bloomberg News yesterday. “However, one thing is already clear: there will be no turning back to where we started from, and that pertains not only to strategy.”

Not Enough

The company declined as much as 48 cents, or 1.8 euros, ro 27 euros in Paris today, and traded at 27.05 euros as of 12:33 p.m. The stock had fallen 12 percent in the month between the first announcement of the merger plan and the day before it fell apart, as investors questioned the rationale of the deal.

EADS, based in Toulouse in southern France, and London- based BAE ended their effort to combine after first announcing the plan on Sept. 12. The disclosure of the project followed months of closed-door negotiations with governments that sought to win over the political stakeholders.

EADS’s supervisory board members continues to appreciate Enders in his leadership role and “renewed their full support” at a regular meeting today, EADS said in a statement today. Chairman Arnaud Lagardere, whose namesake publishing company is a major shareholder in EADS, had demanded the merger modalities be reviewed while discussions were still ongoing.

Unwilling

While France and the U.K. were willing to give Germany a stake of about 9 percent in the enlarged group and thereby equal to France’s future holding, Merkel’s government still failed to warm to the deal on concern the combination would marginalize Europe’s largest economy and focus decision-making in France and the U.K. Germany.

German Deputy Economy Minister Peter Hintze, who is in charge of coordinating the government’s aerospace and defense policy, said the failure of the talks between EADS and BAE was in Germany’s interest, Spiegel magazine reported. Hintze and Enders had clashed before over issues such as company headquarters, which Enders pooled in France this year.

“I think that Germany’s industrial interests are best protected in this form of having a strong production chain from research, development to industrial production,” Hintze was quoted by Spiegel as saying. A ministry spokesman declined to comment on the report.

Enders indicated that the negotiations with BAE over the past few months will lead to deeper business ties between the two companies, regardless of the failed merger.

“Our relationship has been strengthened through this endeavor,” he said. “This is an excellent basis for the further development of our business ties in the defense field.”

To contact the reporters on this story: Benedikt Kammel in Berlin at bkammel@bloomberg.net; Andrea Rothman in Toulouse at aerothman@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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