Still, the deal’s many other questions loomed large Thursday, helping to drive shares of EADS and BAE Systems sharply lower in Europe, as investors grew concerned the tie-up could hit political obstacles and may lack benefits for the companies.
Given that the shares had rallied this year “and the potential for some near-term challenges (both logistical and political) in the deal closure process, we see limited upside at current levels,” Barclays analyst Carter Copeland said in a note suggesting investors scale back holdings in both companies.
Rob Stallard of RBC Capital Markets said he was not convinced the deal made strategic sense, and said the companies needed to provide more details on cost savings and new business opportunities to stem further losses in their shares.
Jay Johnson, CEO of General Dynamics Corp, said he did not expect the deal to trigger a spate of top-tier mergers in the weapons business. Consolidation would be focused mainly on small to medium-sized companies, not the big prime contractors, he said, and only once the outlook for the U.S. defense budget became more certain.
If talks unveiled Wednesday culminate in a deal, BAE shareholders would hold 40 percent and EADS investors 60 percent in a giant with products ranging from Airbus commercial planes to Typhoon warplanes and BAE’s Astute-class nuclear-powered submarines.
The deal is being driven in large part by the need of U.S. and European defense firms to offset the impact of shrinking national military budgets with more revenues from the commercial sector.
But the accord will need the political backing of Germany and France to unravel the 12-year-old shareholder pact underpinning the strategic European aerospace champion, while the enlarged group must win the trust needed to deal with security-minded customers from the Pentagon to the Gulf.