Story ID: 1101212ADP
Political Miscalculation Scuppers EADS-BAE Merger
By: Chris Pocock
Caption: 
Word Count: 491
The proposed 60-40 merger of EADS and BAE Systems was called off after management in both companies miscalculated the reaction of governments and shareholders. Paris and Berlin proved unwilling to give up their stakes in EADS, or reduce them to a degree that was acceptable to the two merging companies, to London, and (perhaps) to Washington. Moreover, BAE’s single biggest shareholder did not support the deal. BAE Systems has now issued a reassuring interim trading statement, but acknowledged that crucial negotiations with Saudi Arabia over the Typhoon (Salam) program have still not been concluded.

BAE Systems chief executive Ian King expressed disappointment about the failure to persuade the governments; France and especially Germany had serious concerns about job losses as well as losing national control over a key technology sector. BAE’s business remained “strong and financially robust,” he added. EADS CEO Tom Enders said, “It is a pity we did not succeed, but I’m glad we tried. I’m sure there will be other challenges we’ll tackle together in the future.” Enders will be especially criticized for failing to gain acceptance for the deal by the German government, and for a lack of personal chemistry with key ministers in Berlin. However, EADS officials deny responsibility for the leak that revealed the merger plan, before the two companies were able to complete their consultations with the key stakeholders.

Earlier this week, British fund manager Invesco Perpetual, BAE’s largest shareholder, said it did not understand the logic of the merger. In a devastating critique, Invesco said, “The merger would materially jeopardize BAE’s unique and privileged position in the U.S. defense market...the level of state shareholding in the combined group will heavily impair its commercial prospects–especially in the U.S.–and result in governance arrangements driven more by political considerations than shareholder value creation.” Invesco expressed confidence in BAE Systems’ future as a stand-alone company, noting that both BAE and EADS could achieve diversification for themselves “more simply and cheaply.” Invesco holds 13 percent of BAE.

BAE’s interim statement predicted “modest growth in underlying earnings per share for 2012, assuming a satisfactory conclusion to the pricing negotiations this year with the Saudi Arabian government” on the Typhoon deal. Only 24 of the projected 72 aircraft have been delivered, and no agreement has yet been reached on the upgrade configuration of the remainder. Neither has a long-term support deal for the Typhoon been concluded yet, including maintenance and upgrade facilities within the Kingdom. Further, BAE Systems acknowledged that negotiations for a further five years of support to the wider Saudi British Defence Co-operation Programme (SBDCP), which includes upgrade of the Tornado combat aircraft and new weapons, plus Hawk and PC-9 trainers, are also incomplete. On the brighter side, BAE reported that a deal to supply 12 Typhoons to Oman should be concluded this year. They will be in Tranche 3 configuration.