Dossier

Getting married to escape the in-laws: A guide to the BAE-EADS merger

September 26, 2012
September 26, 2012

Tom Enders is the kind of CEO journalists use the word “swashbuckling” to describe. It seems like the former German paratrooper is always hang gliding, jumping out of airplanes, or launching a €37 billion merger between the world’s third and seventh largest defense contractors to create the globe’s largest aerospace firm, with 230,000 employees speaking four languages in five home markets.

Did we mention he’s been on the job for three months?

But if Enders’ European Aeronautic Defence and Space Company (EADS) is to successfully merge with British Aerospace Systems (BAE), he will have to navigate myriad political complexities. The latest potential hold up in the deal concerns complaints from two of his more unique shareholders, the governments of Germany and France. The two countries each influence 22.5% of EADS’ stock, in Germany’s case through a consortium of shareholding firms lead by automaker Daimler, and in France’s case through a direct ownership and the holdings of Lagardère, a French media conglomerate.

Enders is said to resent political meddling from Berlin and Paris and sees the merger as a way out. A deal with the British defense contractor, which does significant business in the United States, would entail France and Germany relinquishing day-to-day management oversight; instead, “golden shares” awarded to the countries would allow them to veto hostile takeover attempts or transactions involving domestically classified materials.

BAE, meanwhile, faces a shrinking market with defense cutbacks on the horizon in its two Anglo markets, so a marriage with EADS, best known for its commercially-focused aircraft subsidiary, Airbus, and on the look out to expand its defense business, makes sense. The new company would be in a better position to accomplish another long-time goal of Enders': Competing with the two largest aerospace firms, Lockheed Martin and Boeing,  in the American market.

Germany is more worried about jobs than national strategy. While German opposition politicians worry that a combined company might circumvent strict German rules on arms exports, Angela Merkel’s government fears that high-tech jobs in politically-important provinces like Bavaria could migrate to France or the UK. German defense officials are concerned that they’ll lose out on competition if one contractor has a virtual monopoly on the European continent. Enders speaks to the German Parliament on September 26.

France also worries about jobs, and has a traditionally more involved approach to EADS, which is headquartered in Toulouse. French Prime Minister François Hollande has said he will support various conditions on the deal relating to “employment, industrial strategy, [and] defense activities” but has yet to offer more specifics. France may aim to keep its direct stake in the company, which might be a deal-breaker.

Spain also owns 5.45% of the company, but the Spanish are busy at the moment with their debt crisis.

Russia has a similarly-sized stake. A state-owned bank bought shares in 2006, and Vladimir Putin, the present, appears to be interested in jobs too.

British Prime Minister David Cameron has endorsed the deal as a way of preserving BAE, and is lobbying his continental counterparts to get on board.

However, though the bride and groom and the in-laws are in Europe, much of the lobbying is in Washington, DC. The world’s biggest defense spender is concerned about the marketplace, and the perennially contentious relationship between major defense contractors, particularly Boeing, and their overseas rivals. A special committee of eight cabinet secretaries will need to approve the merger, but US Department of Defense officials generally believe more stronger competition will be beneficial.

To keep all these parties happy, the final deal will be byzantineTo preserve national secrets and maintain control over a huge multi-national company, many different boards will be required, with many rules: For one, the US defense subsidiary will need a separate board with a British director and no French or German executives, to satisfy US national-security requirements.

The deadline is October 10. Under British merger rules, the companies have 28 days from the time their plans leak to markets to get a deal done. The French, German and Biritish defense ministers are expected to discuss the deal on the sidelines of an EU defense meeting on Sept. 26 and 27.

Rolls-Royce and Northrop Grumman are hoping for a bite at the apple too. If the EADS bid fails, both companies are reportedly interested in making deals with BAE that might put EADS at a disadvantage in the global marketplace. And if US regulators approve the deal, expect American contractors to start sniffing around for take-over opportunities of their own.

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