Oct. 10 (Bloomberg) -- European Aeronautic, Defence & Space Co. and BAE Systems Plc abandoned their planned merger on government resistance, leaving in tatters their aspiration to create the world’s largest aerospace and defense company.
The two companies said they terminated the deal because the “interests of the parties’ government stakeholders cannot be adequately reconciled with each other or with the objectives” of the merger. The deal crumbled just hours before a deadline expired to formalize the agreement or win more time.
Germany became a major stumbling block on the path to an accord, and BAE Chief Executive Officer Ian King said there was more understanding with France and the U.K. BAE Chairman Dick Olver said he would not revisit merger talks with EADS unless government positions changed significantly, and that the company will not look elsewhere for a new partner.
“It is, of course, a pity we didn’t succeed but I’m glad we tried,” EADS CEO Tom Enders said in a statement.
The attempt to build an equal to Boeing Co. exposed the divisions in Europe, with Germany keen to preserve a balance of power with France and the U.K. wary to check political meddling at the hands of the French. The breakdown blocks BAE’s path to a civil aviation business in times of shrinking defense budgets, and marks the second failure in a decade for EADS to combine aerospace assets from Europe’s three largest economies.
BAE will focus on executing the existing strategy, Olver said, with no management team changes planned. Enders himself foreshadowed the possible collapse of the deal in an employee newsletter released yesterday, as it became clear that German opposition to the deal had hardened.
“If we fail, it will not be because the two companies couldn’t agree. It will be because others couldn’t get their act together and provide the necessary prerequisites for the combination,” Enders was cited as saying.
EADS, based in Toulouse in southern France, and London-based BAE first said on Sept. 12 that they were exploring a merger, after Bloomberg News reported the two sides were in talks. Even if they two companies had won government backing, they still faced investors and a U.S. review. King said the fact that he was working against a “leak” and was unable to lay out the full merits of the merger complicated matters.
The proposed merger had unsettled investors from the start, with EADS losing more than 11 percent since the plan became public. The stock rose 1.38 euros, or 5.3 percent, to 27.48 euros today after talks ended. BAE dropped 4.5 pence, or 1.4 percent, to 320.9 pence in London.
The German government had sought a token center of command and job guarantees to give it equal status with the other states, people close to the talks said. France owns a direct 15 percent stake in EADS, while German interests are represented by Daimler AG. Germany maintained a resistance even after the British and French governments agreed to allow Germany to hold 9 percent of the combined company, on a par with France.
As talks intensified, there was growing concern that Germany would be left outside a Franco-British axis. Upon becoming CEO of EADS in June, Enders had bundled headquarters to Toulouse in France, the home of planemaker Airbus SAS, its biggest unit.
The move marginalized Munich as one of two operating headquarters and formerly the base for the chief financial officer. London would become the center for defense operations in the event of a merger, leaving Germany without any headquarters to call its own.
“It’s incredibly shortsighted,” said Michel Merluzeau, an aviation consultant at G2 Solutions in Kirkland, Washington. “European governments are still very focused on national interests, national programs. How can anyone plan for additional EU defense integration with such a territorial mindset?”
EADS and BAE spent more than six months putting together the merger plan. Initial talks between Enders and King focused on how to more effectively structure the Eurofighter joint venture after their Typhoon bid lost a multi-billion dollar competition in India to the Dassault Aviation SA Rafale.
“The merger would have produced a combined business that would have been a greater force for competition and growth across both the commercial aerospace and defense sectors and which would have delivered tangible benefits to all stakeholders,” the companies said in the joint release.
By June, those talks evolved into merger discussions and in July the companies agreed the 60-40 ownership split. That distribution quickly came under siege from lawmakers particularly in Germany, who questioned the relationship and demanded that EADS hold closer to 70 percent of the group.
The collapse of the talks doesn’t change much in the short term for EADS, whose Airbus business promises strong growth, said Zafar Khan, an analyst at Societe Generale SA in London. BAE, on the other hand, may face the issue of a break-up, he said.
“For BAE, the strategy has failed,” Zafar said today in an interview before the collapse was announced. “In agreeing to merging with EADS they’ve really admitted this failure and if the deal doesn’t happen they don’t have a great deal of options they can pursue.
The merger’s failure marks the second time that Enders finds himself on the losing end of an effort to combine Germany’s defense and aerospace industry with the U.K.’s.
In 1998, Enders was head of strategy for Deutsche Aerospace when the business sought to merge with BAE-forerunner British Aerospace. As talks unfolded, GEC Marconi was put on the market and British Aerospace merged with the U.K. defense electronics business. Jilted Deutsche Aerospace then pursued a merger with French aerospace entities to form EADS in 2000.
Governments’ failure to agree to merger terms and again sink a deal puts into question the future of Enders, who has been pushing for years to end German and French government involvement in EADS, which dates back to the firm’s creation in 2000. Instead, Enders remains saddled with both governments and an EADS Chairman in Arnaud Lagardere who opposed the deal.
France maintains a 22.5 percent shareholding, 15 percent directly and 7.5 percent through publishing firm Lagardere SCA, with German interests represented through carmaker Daimler’s 22.5 percent holding. Both Daimler and Lagardere have said they want to eventually pare their holdings to focus on their main assets, with Daimler promising shareholders a sale this year.
Combining EADS and BAE would have allowed EADS to balance out its Airbus SAS civil aviation business with more defense assets, while BAE would have gained access to the civil business at a time when governments are slashing defense budgets. EADS would have also enlarged its U.S. defense business, which has made few inroads into the Department on Defense, while BAE is the Pentagon’s fourth-largest contractor.
In the end, EADS and BAE failed to overcome national political interests. Opposition also came from financial investors, with BAE’s largest shareholder, Invesco Ltd., questioning the logic of the deal and voicing concern that more state involvement would jeopardize BAE’s standing in the U.S.
Enders said last month that he didn’t want to go on much longer without a firm commitment because he needed to reinforce his message of the merger’s merits with investors. In the absence of a broader consent, he pulled the plug today.
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