Western defense spending is under severe pressure from public finances on both sides of the Atlantic, forcing Europe’s two largest defense companies to rethink strategies for growth.

“I think it is now recognised that you can’t sustain a global defense company off the budget of a medium-sized or even large-sized European country,” said Nick Witney, senior research at the European Council on Foreign Relations.

BAE will regain a foothold in the commercial aircraft business through Airbus, undoing its decision to exit in 2006 and giving up a pure-play defense strategy.

EADS will absorb the consequences of failing to win a huge contract to sell tankers to the U.S. Air Force last year and give up trying to conquer the world’s largest arms market alone.

Yet one investor who bought into EADS in 2009 at less than half its price before the talks announcement fretted that the deal would dilute EADS’ existing attractions and so ultimately turn sour for both sets of shareholders.

“This is a deal without logic and without winners. The whole of the proposed combination is inferior to the sum of the parts,” said Barry Norris of UK-based Argonaut Capital Partners, holder of 500,000 EADS shares.

The deal would unpick the ownership pact agreed for EADS since its creation in a 2000 merger. French media-to-aerospace group Lagardere owns 7.5 percent of EADS, with the French state holding 15 percent. German car maker Daimler holds 15 percent, with 22.5 percent voting rights.

The current status quo could be replaced by special shares for all three governments that would give them the power to veto any hostile takeover bid.

DAIMLER EXIT?