BAE-EADS Deal Crashes with Governments Failing to Agree

BAE Systems (LON:BA, PINK:BAESY) and the European Aeronautic Defence and Space Company (EPA:EAD) officially called off the proposed merger which would have created a European giant to rival the US Boeing (NYSE:BA) after the governments of France, Germany and the UK failed to agree on key elements of the deal.

**BAE, EADS End Merger Talks**
On 10 October 2012, The Times reported that BAE and EADS would not seek an extension from the Takeover Panel for their talks to create the world’s biggest defence and aerospace group. The collapse of the deal follows several weeks of tense negotiations, which failed to overcome the political, economic and national security concerns of the British, French and German governments. The Times quotes BAE as saying that “discussions with the relevant governments had not reached a point where both companies could fully disclose the benefits and detailed business case for this merger”.

“It is, of course, a pity we didn’t succeed but I’m glad we tried,” commented Tom Enders, CEO of EADS, as quoted by The Times. “I’m sure there will be other challenges we’ll tackle together in the future.” BAE and EADS, however, will not be able to resume negotiations for at least six months.
**German Resistance**
Reuters reports that several sources close to the negotiations have indicated that Germany’s Chancellor Angela Merkel opposed the proposal despite the British and French efforts to meet Berlin’s requests. When asked whether he had encountered more problems with Berlin than with Paris, Mr King said: “That would be an accurate representation.” As quoted by the Financial Times, a senior French official noted that the deal had failed because “the Germans had blocked it.”

!m[London, Berlin and Paris Blame Each Other For Not Backing The Merger ](/uploads/story/558/thumbs/pic1_inline.png)It would seem that the Germans do not share the same opinion, with The Times quoting Germany’s defence minister Thomas de Maiziere as saying that the collapse was not his country’s fault. “I take note of [the failure of the deal] and I am not totally surprised,” he noted, adding that it was “a commercial decision”.

In the UK, Tory MP Ben Wallace told BBC Radio 4’s World at One that he was relieved at the deal’s collapse. “What was very clear was the Germans and French don’t do business the way we do,” Mr Wallace said as quoted by The Times. “It was a dangerous decision to go down this line given, if it failed, BAE might be weakened, and indeed put British jobs at risk,” he added expressing one of the main British concerns which became evident throughout the negotiations.

Bloomberg reports that the failure of the three European governments to reach a consensus was also indicative of the state of European integration. “This sad failure shows you how much national rivalries still account for in Europe,” noted Philippe Moreau-Defarges, a researcher at the Paris-based French Institute of International Affairs, as quoted by Bloomberg. “But it’s also a clash between an Anglo-French outlook that is more open to the world, and a German view that is more turned inward to the continent.”
**BAE Shares Down, EADS Goes Up**
Meanwhile, the merger collapse affected BAE and EADS shares differently, with BAE going down by 1.38 percent and EADS gaining 5.29 percent, as reported by Reuters. “The market perceived that BAE would get a better part of the deal,” said Richard Hunter, head of equities at investment managers
Hargreaves Lansdown (LON:HL), as quoted by The Times.
BAE shareholders have indicated that they are not looking for management changes at this stage, while Mr King told the FT that he would continue to talk with investors to clarify the company strategy. In a letter to employees, EADS’ Mr Enders in turn noted that the company would need to review their group strategy and defence activities in particular. “However, one thing is already clear: there will be no turning back to where we started from, and that pertains not only to strategy,” Mr Enders wrote in the letter, as quoted by Bloomberg.

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