Jens Flottau, Amy Butler, Amy Svitak and John Morris Berlin

The merger of British giant BAE Systems and EADS in Europe is likely to trigger further consolidation in aerospace companies globally.

In particular, it would put other top players such as Italy's Finmeccanica and France's Thales under pressure to react in an attempt to take on what would become the largest airspace company on the globe.

EADS and BAE Systems confirmed on Sept. 12 that they are talking about combining their businesses. EADS's existing shareholders would control 60% of the combined entity while BAE would account for the remaining 40%. “BAE Systems and EADS have a long history of collaboration and are currently partners in a number of important projects, including the Eurofighter and MBDA joint ventures,” BAE stated. “The potential combination would create a world-class international aerospace, defense and security group with substantial centers of manufacturing and technology excellence in France, Germany, Spain, the U.K. and the U.S.”

The new company would garner around $100 billion in annual revenues, compared with Boeing's $68 billion, making it by far the largest aerospace group (see page 14).

Boeing CEO Jim McNerney says the merger, if approved, is unlikely to “threaten us fundamentally,” though he acknowledges that the deal reshapes EADS's structure and holdings to more closely mirror those of Boeing in terms of a civil/defense balance.

According to senior EADS officials, the two entities will remain separate under a newly created holding structure. Golden shares for Germany, France and the U.K. are to ensure that the new group is protected against hostile takeovers and that strategically sensitive, often classified, programs are under firm control.

The proposed deal, however, is being met with criticism by some investors. EADS shares took a deep dive the morning after the plans became public. They were down 9% in early trading and BAE Systems dropped by 6% following an initial steep climb a day earlier. Citigroup downgraded its EADS guidance because it believes that synergies will be difficult to achieve.