Failed EADS-BAE Merger: A Dream Lost in Political Translation

The attempts to bring together Dutch aerospace conglomerate EADS NV and Britain's BAE Systems to create the biggest aerospace and defense group in the world got mired in the quicksand of politics and eventually failed.

The merger was meant to be unprecedented. But the attempts to bring together Dutch aerospace conglomerate EADS NV (IW 1000/59) and Britain's BAE Systems PLC (IW 1000/158) to create the biggest aerospace and defense group in the world got mired in the quicksand of politics and eventually failed.

For those from the British arms maker and the parent company of Airbus, who for months worked on the mega-merger, the dream stopped short Wednesday when both groups scuttled further talks over irreconcilable differences between the leaders of Britain, France and Germany.

London holds a golden share in BAE Systems and wants to maintain the defense company's special relationship with the U.S. Pentagon by limiting government funds in the new giant's capital.

Paris, on the other hand, holds 15% of EADS shares, which would have shrunk to 9% in the merger.

And Germany already had plans to buy 7.5% of the stocks held by carmaker Daimler AG (IW 1000/18) and insisted on a parity of power with France.

A compromise solution between France and Britain had been found, but in the end Berlin feared that German plants that contribute to the Eurofighter aircraft would have been sidelined by BAE Systems.

EADS executives point out that Germany never explained why it dropped the blockbuster merger.

During talks, they said, Germany called for the new company to be headquartered in Germany when EADS CEO Tom Enders already had decided on Toulouse in southern France.

"I'm ready to admit that we never expected to face such opposition against the deal, in particular not in Berlin," Enders said in a letter to employees.

Merkel Showed Little Interest

As soon as plans to create the biggest aerospace group in the world -- drawn up in spring and with an agreement in principle by the three governments involved in July -- were revealed by the press in mid-September, comments coming from Berlin were anything but positive.

"It is questionable whether the proposed structure can actually be agreed to," DPA news agency said, citing German government sources.

In spite of these "serious reservations," France said it would coordinate its position with Germany but in fact failed to overcome German misgivings, said a source close to the talks.

Peter Hintze, an old friend of Enders who is government coordinator of German aerospace policy, campaigned against the merger, raising fears of job losses as state and national elections loom in Germany.

EADS, on the other hand, explained that a merger with BAE Systems would open up new markets.

An analyst in Berlin meanwhile pointed to the little interest shown by Chancellor Angela Merkel.

"We have a policy for the auto industry but not for the defense industry. The government doesn't care," said Christian Moelling of Germany's Foundation for Science and Politics think tank.

Whatever the reasons for the failed tie-up, Germany must live with the industrial and diplomatic repercussions.

And German media fear that EADS will lose incentive to a promise to keep jobs in the military sector.

Since Berlin seems to want to enter EADS's capital, "we will have to rediscuss the shareholders' agreement," said a French government source.

"We don't mind reopening talks but if they expect anything we will have to see what's in it for us."

For Enders, the merger also would have been an opportunity to do away with the shareholders' agreement, which hampers company strategy.

At EADS, some even wonder whether matters could have turned out differently had Enders not had a sports accident in late August, keeping him from pleading his cause with Merkel during her trip to China.

Copyright Agence France-Presse, 2012

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