Last week’s confirmation that BAE and EADS are discussing a 40:60 merger was very light on detail but has been heavily commented upon.
While the BAE announcement mentioned only unspecified procurement and sourcing benefits and “new business opportunities,” a number of potential drivers have been widely mooted in the press, namely:
- The creation of a ‘European Champion’ to compete with Boeing;
- To combine EADS’s strong civil aerospace activites with BAE’s defence capabilities, and increase access to the US market;
- For EADS to loosen the shackles of government ownership and politically interference; and
- For BAE to reduce dependence on defence budgets, particularly these of the US and UK.
If we ignore for a moment the fact that these drivers actually contradict each other (who expects US politicians to encourage more US defence work go to a ‘European Champion’?) and take these at face value, the strategy – while grandiose – appears weak and opportunistic.
Buying BAE now may seem good value for EADS, which is benefitting from the boom in civil aircraft orders while the UK prime suffers from defence cuts and possible US sequester. But the long-term benefits for EADS’s shareholders are at best questionable.
Rather than a significant move into the defence market, it seems more likely that the EADS board sees the opportunity to control the enlarged entity and to reduce the influence of the French and German governments. Will the price to be paid for the support of Paris and Berlin be that most of the synergy cost savings fall in the UK, despite it offering the more flexible business environment? Wherever the axe falls, this is not particularly strong strategic reasoning for such a significant move.
For BAE the deal is potentially worse still. Firstly, it might jeopardise the company’s hard-won and expensively-earned position with the DoD. Secondly, it may be forced to sell assets to get past competition concerns, almost inevitably at a discount. In addition, BAE’s position as design authority on several programmes critical to UK security may be called into question. Less specifically, it’s simply hard not to believe that they are crystallising value at the bottom of the market.
The complexity of this deal and its implications will concern sovereign customers around the world, particularly as BAE’s and EADS’s recent history of working together is, at best, mixed – as the calamity around the Indian MMPCA so painfully highlighted.
There will be many barriers to overcome for this merger to happen; for such a complex combination, the deal itself might be the easy part.