BAE Merger Off

October 10, 2012 by  

BAE Merger Off, BAE Systems and EADS have abandoned their proposed €35bn (£25bn) merger after failing to overcome political obstacles to the combination of Britain’s largest defence contractor and the owner of Airbus. In a joint statement the companies said they could not resolve government concerns about the deal, with the UK, French and German administrations unable to come to an agreed position.

“It has become clear that the interests of the parties’ government stakeholders cannot be adequately reconciled with each other or with the objectives that BAE Systems and EADS established for the merger,” the statement said.

“BAE Systems and EADS have therefore decided it is in the best interests of their companies and shareholders to terminate the discussions and to continue to focus on delivering their respective strategies.”

The announcement raises question marks over the long-term future of BAE now that it has signalled it needs a merger or acquisition and poses questions over its management, after the company’s largest shareholder took the unusual step of criticising the deal publicly.

Sources close to the deal said that the German chancellor, Angela Merkel, had emerged as the most significant obstacle to an ambitious transaction that would have created an industrial behemoth with 220,000 employees worldwide, making products from nuclear submarines and Typhoon fighter jets to the A380 superjumbo.

Speaking before the deal was officially terminated, the source said: “The fundamental problem is that Merkel does not feel comfortable with the deal, full stop.”

The source added that the German leader appeared to have deep concerns over the notion of merging a civil aerospace manufacturer with a defence group. Speaking after the announcement, another sources said that Merkel was “a key factor in the decision to terminate the talks”, with her objections becoming clear only over the last 24 hours. Prior to that, both companies were expecting to seek an extension to a UK Takeover Panel deadline that expired at 5pm.

However, as alluded to by the joint statement on Wednesday afternoon, the UK and French governments also harboured concerns about the transaction to the extent that every workable solution drew an objection from one of the three governments.

France, which controlled 15% of EADS, was unhappy with German demands for the business to have its headquarters in Munich, while Germany was concerned that France would have a bigger shareholding in the new business than the 9% stake that it was seeking. The UK, in turn, refused to allow German and French political representatives to sit on the BAE board, as would have been likely under the dual-listed structure envisaged by both companies.

BAE and EADS said they had made significant progress in thrashing out the shape of their merged business, including the management structure, the dividend policy and cost savings.

“BAE Systems and EADS believe that the merger was based on sound industrial logic,” the companies said, having argued over the last month that the deal would protect BAE from the troubled UK defence market while giving EADS access to the US military sector.

“It represented a unique opportunity to create a combination from two strong and successful companies greater than the sum of the parts. The merger would have produced a combined business that would have been a technology leader and a greater force for competition and growth across both the commercial aerospace and defence sectors and which would have delivered tangible benefits to all stakeholders.”

Ian King, the BAE chief executive, said he was “obviously disappointed” that an agreement could not be reached but defended BAE’s prospects, which will now be the subject of intense political and City debate.

“We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defence and security group,” he said. “However, our business remains strong and financially robust. We continue to see opportunities across our platforms and services offerings and in the various international markets in which we operate. We remain committed to delivering total shareholder value and look to the future with confidence.”

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