On the defense side, the merger, if approved, would clearly give EADS penetration into the U.S. market by way of BAE's substantial Pentagon business, much of which is in the ground vehicles area. Likewise, EADS has a substantially better presence in the defense market in Latin America and the Middle East. BAE CEO Linda Hudson told employees in a memo last week that the product lines are “highly complementary” between the two companies, and that the merger will strengthen their presence in the U.S. market.
“This would raise a question for Dassault, Saab and Finmeccanica about how they react to this kind of merger,” Barrie notes, adding that a merger as large as BAE and EADS could spark further market shifts in Europe.
While European regulatory agencies could raise red flags about the plan, there is little chance of the U.S. government standing in the way of the deal. “This is basically a European transaction that raises no anti-trust issue in the U.S. military market,” says Loren Thompson, chief operating officer of the Lexington Institute, a Washington-based think tank. Thompson is a also a consultant for BAE.
Though there are some fairly immediate gains to be had from the merger—reducing administrative staff and taking advantage of each other's supply lines, for example—a BAE official says it is too early to tell if there will be an impact on any major near-term business pursuits.
“A merger may not signal a major strengthening of the combined firms' defense operations,” Capital Alpha Partners wrote. “There might me some savings from consolidation of overhead and possibly larger supply agreements, but the politics of the location and employment in defense facilities in the U.K., France and Germany suggests to us that savings from consolidation will take years to materialize and lots of political work to achieve.”
If the deal goes ahead, the new group will own the overwhelming share in the Eurofighter program. EADS will add BAE's 33% share in Eurofighter to its 46% (it earlier added Spain's 13% to its own 33%) for a total of 79% of the program. Italy's Finmeccanica owns the remaining 21%.
One of the key challenges until the deal can be closed will be convincing the shareholders, says one official. In his view, governments are not necessarily the ones that need the most persuading. In fact, it was Arnaud Lagardere—chairman of the Lagardere Group that owns 7.5% of EADS and the aerospace company's current chairman—who indicated in an initial reaction to the proposal that the EADS board had not yet been informed. Lagardere went on to say that he would recommend approval only after the full consequences of the proposed combination become clear.
One of the most delicate and significant parts of the entire transaction will center on how European government participation in the industry will shift. The British government has a special share in BAE Systems because of the company's involvement in so many crucial defense programs. The situation on the EADS side is even more complex: The French government currently owns 15% of the company and Germany is on its way to buying up to a 15% stake from Daimler and a consortium of banks, to balance state ownership. Industry sources believe that Germany will now no longer buy, because there is no added value for the country if it already has the necessary control through its new golden share.
According to BAE, “the parties envisage issuing special shares in BAE Systems and EADS to each of the French, German and U.K. governments to replace the existing government share in BAE Systems and the stakeholder concert party arrangements in EADS.” The concert party refers to the so-called shareholder pact that regulates the balance of power among core investors.
EADS management has been trying for years to shed government shareholders in order to establish the group as a purely private company. That effort has failed so far, mainly because France was unwilling to reduce its stake. The two private shareholders, Lagardere and Daimler, have stated their interest to sell their stakes eventually, but have not put a firm timeline on their intentions.