Markets take aim at BAE/EADS deal

News that defence giant BAE Systems is in merger talks with Euro-oppo EADS has seen shares in both fall. Oops.

by Andrew Saunders
Last Updated: 06 Nov 2012
EADS (European Aeronautics, Defence and Space, since you ask) shares dropped by over 10% this morning while BAE’s stock - which rose yesterday - lost nearly all its gains, down almost 6%. Not the reaction that such big corporate beasts hope for when announcing a potentially ‘game-changing’ mega-merger. If the shareholders aren’t excited now at the start of what promises to be a long and complicated (not to say potentially explosive) betrothal, it doesn’t bode too well for the long term.
So why the lack of enthusiasm? It’s not so much the commercial logic which is putting them off it seems. The prospect of a defence giant to rival Lockheed Martin and Boeing (a combined BAE/EADS would have sales of £60bn and employ 220,000 worldwide) ought to have shareholders salivating. Rather it’s partly the terms of the deal and partly the regulatory and government hurdles that any such merger would face that are giving markets the collywobbles.
Having to seek a merger is rather a blow for BAE Systems prestige - the firm very publicly bet on the US market a few years ago, but defence budget cuts have seen its balance sheet stretched and it has struggled to deliver exports promised to shareholders.  
The current proposal would see EADS as the definite ‘winner’ with 60% of the combined shares and its current CEO Tom Enders probably taking the top job too. Critics reckon that’s a bad deal for BAE which would account for more than 40% of combined sales. So a certain amount of argy-bargy on the price and structure of any union can be expected in the pipeline.
The issue of government interference however is much harder to call. A huge international defence tie-up like this is bound to result in an absolute storm of official interest, not only from the countries where the two companies have operations (that is most of Europe for starters) but also from the countries to which they sell arms. That’s pretty much the rest of the developed world.
The US in particular can be expected to take a very active interest in the progress of the tie-up. The prospect of a pan-European conglomerate taking over the reins at BAE - a major supplier to the US forces - may not go down well with our friends across the pond, who are not noted for the high esteem in which they hold many continental European nations. This is the country where the French (key stakeholders in EADS) are sometimes known as ‘Cheese-eating surrender monkeys’ after all.
Even the UK government - which famously adopts a laissez faire approach to foreign ownership, which would not be tolerated in most other developed nations - can be expected to take an interest in this one. It has a Golden Share in BAE which (in theory) allows it to veto any deal which is not in the national interest. Here at MT we would be pretty amazed to see that veto used however, the entire weight of recent corporate history suggesting otherwise.
What is rather more likely is that, now that BAE is ‘in play’ as they say in the City, a rival bid from a US firm is being put together as we write. This one will run and run.

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