Possible BAE/EADS merger

[Highwayman47]

The numbers:

http://otp.investis.com/clients/uk/b...&newsid=259523

Anthony Dunn is right on the money here- the triumph of the Warton Mafia over common sense, I think. I don't think they ever liked the civil programmes and only Jetsream 31 made any money and they didn't see the potential in business jets hence its sale to Raytheon nearly 20 years ago. All very sad and the dive into the US defence market doesn't look so good now whilst Airbus is motoring along nicely. Is this the end of airframing in the UK ?

[Vega ECM]

Anthony Dunn is right on the money here- the triumph of the Warton Mafia over common sense, I think. I don't think they ever liked the civil programmes and only Jetsream 31 made any money and they didn't see the potential in business jets hence its sale to Raytheon nearly 20 years ago. All very sad and the dive into the US defence market doesn't look so good now whilst Airbus is motoring along nicely. Is this the end of airframing in the UK ?

Complete arframe design soley in the Uk is already dead......

[mrmalaya]

Parliamentary body to look at impact on the UK national interest:

http://www.flightglobal.com/news/art...tie-up-376911/

[mrmalaya]

From Flight Global:

http://www.flightglobal.com/news/art...oposal-377007/

[Jō Asakura]

Enders & BAE both want to reduce the political influence in the new merged company. He is proposing the French, German and UK governments each have a golden share in EADS-BAE, entitling them to block a hostile takeover, but no further veto rights.

Berlin & Paris are pushing for a 13.5% stake each, Enders may countenance this share- but the UK (and the US) are likely to oppose any holding above 9%.

[swerve]

13.5% each? The German government currently doesn't own anything. Daimler owns 22.5% of EADS & is a friendly investor. The French government owns 2.3% directly (via state investment funds) & 15% indirectly via its stake in SOGEADE, a vehicle for holding EADS shares which owns 22.5% & is shared with Lagardere, also a friendly investor. But Lagardere & Daimler have both expressed a desire to get out.

13.5% of the new firm each is therefore a huge increase in combined direct shareholdings. 13.5% isn't even a reduction in the total French stake.

It's only 6 years since BAe sold 20% of Airbus for peanuts. The former BAe units that made up that stake have since flourished. Stupid, stupid.

[mrmalaya]

Swerve, I being stupid, but are you saying BAE are being dumb for merging?

How would you play it? It is very complicated I hope you agree.

[kev 99]

Swerve, I being stupid, but are you saying BAE are being dumb for merging?

How would you play it? It is very complicated I hope you agree.

He's saying they were dumb for selling their EADS stake (for peanuts) in the first place.

[Jō Asakura]

13.5% each? The German government currently doesn't own anything. Daimler owns 22.5% of EADS & is a friendly investor. The French government owns 2.3% directly (via state investment funds) & 15% indirectly via its stake in SOGEADE, a vehicle for holding EADS shares which owns 22.5% & is shared with Lagardere, also a friendly investor. But Lagardere & Daimler have both expressed a desire to get out.

13.5% of the new firm each is therefore a huge increase in combined direct shareholdings. 13.5% isn't even a reduction in the total French stake.

It's only 6 years since BAe sold 20% of Airbus for peanuts. The former BAe units that made up that stake have since flourished. Stupid, stupid.

Yip, 13.5% each. Daimler and Lagarde's stakes have only served as proxies for Berlin and Paris to slug it out for influence over EADS.

To be fair, the sale of BAE's 20% Airbus stake was at a time when the latter was enduring a 'perfect storm' regarding profit warnings & share price (which on one occasion led to a 26% fall in one day!), and falling competitiveness due to the strength of the Euro vs. the $, hence the evaluation by Rothschild of €2.75bn.

This seriously dented it's ambitions for further acquisitions in the US, and has resulted in a share buy-back scheme that's only half complete alongside an on going pensions black hole. Then insult to injury as 'The War on Terror' winds down- Airbus starts to outperform. Now the latest (and greatest) hurdle- deep European defence cuts and (probably) sequestration in the US.

So BAE SYTEMS has been both a beneficiary and victim of circumstance, but having a board room full of 'Mr Beans' and 'Scrooges' throughout its history certainly hasn't helped.

I thought this might cheer you guys up (best viewed in 720p):

http://www.youtube.com/watch?v=kpZhZAr1cQU

[swerve]

I understand the logic behind the BAe sale of its Airbus stake, but I think that the reasoning was flawed. Short-term fluctuations were mistaken for long-term trends. BAe sold out of Airbus at the bottom of the market, & bought US firms at the top of the market. It's similar, though less catastrophic, to the strategy which destroyed Marconi. That example should have been a lesson to the BAe management - but it wasn't.

The time to invest in sellers to the US military is NOT after the US has been ramping up expenditure for a few years. This is the classic naive investor's mistake, but with none of the excuses. Momentum investing? Can work if you're trading rapidly, but not when you're buying whole companies with the intention of keeping them.

There should be a law forbidding executives of British defence manufacturers buying US firms. It always ends in tears. Anyone remember Ferranti?

BTW, I've seen those Korean girls before. I'll take the one in red shorts.

[Steamer Ned]

Re post #70, I certainly remember Ferranti, having been employed by them from '79 to '94. Are you aware of any other British company that bought US defence/security interests and then discovered a massive circular fraud lay at the heart of the largest contract? A bit of a special case, perhaps.

However, and something you touched on in your post #27, in the current EADS/BAE Systems debate, I've so far seen no specific reference to the requirement for a US proxy board to be in place, comprising US citizens only, through which all US defence/security business had to be channelled. The so-called 'special security agreement' set up between the UK and US specifically to enable BAE Systems to acquire US assets may perhaps contain this requirement.

[jbritchford]

The deal has been cancelled.

Probably for the best, but it doesn't preclude greater co-operation in the future, which I think we should all welcome.

[mrmalaya]

what next for BAE?

http://www.bbc.co.uk/news/business-19897699

[swerve]

Re post #70, I certainly remember Ferranti, having been employed by them from '79 to '94. Are you aware of any other British company that bought US defence/security interests and then discovered a massive circular fraud lay at the heart of the largest contract? A bit of a special case, perhaps.

No, but ISC was deeply involved with the CIA. Remember the letter from the former head of the US NSA, & former deputy director of the CIA, which was sent to the judge praising the head of ISC for his patriotism & help to his country? Do you expect a firm with a former NSA head & former CIA deputy director on its proxy board to be deeply involved in illegal activities? OK, yes you do.

The Ferranti scam seems to have been the retirement plan of a CIA proxy who saw the end of an income stream which his firm had become dependent on. Ferranti couldn't see the real state of affairs because it was, well, secret. It's a risk you take when buying companies like that. You, as a foreigner, aren't privy to everything that's going on in the firms you're buying. ISC is an extreme example, but to varying degrees that risk is always present when you buy into any US defence firm with black box businesses.

[quadbike]

Good BAE in its present form is needed for Romney's America and the U.S-Iran war of 2014.

[Nicolas10]

I understand the logic behind the BAe sale of its Airbus stake, but I think that the reasoning was flawed. Short-term fluctuations were mistaken for long-term trends. BAe sold out of Airbus at the bottom of the market, & bought US firms at the top of the market. It's similar, though less catastrophic, to the strategy which destroyed Marconi. That example should have been a lesson to the BAe management - but it wasn't.

And YET another "mistake" that benefits the US industry at the cost to the UK's industry. Are we starting to see a pattern?

Nic

[RN Phantom]

As others have said its BAe's own fault it's in this mess. Like many British firms its had no strategy except going for the quick buck, that's why they flogged off their Airbus shares when they took fright at the rising A380 development costs, their ownership of Rover was largely responsible for that firm's eventual demise. When BMW took over they discovered that the Longbridge plant needed massive investment to remain viable and BAe's asset stripping meant Rover couldn't generate the necessary cash itself.

It also needs to be asked why BAe were allowed to give up on commercial aircraft and flog off their Airbus shares, the Government should have been keeping a much tighter reign on BAe but of course this is Britain and we don't do "Strategic Thinking."

[Snow Monkey]

Yeah... I'm not surprised given all the signs since it was announced.
But... If we really were to believe the claims of great synergies, etc,
wouldn't it make sense for BAE and EADS to at least explore some sectoral JV's?
On the other hand, if it wasn't really about that, but merely a financial/corporate scheme
to prop up BAE's precipitous position with big Airbus/Eurocopter cashflows...
(I don't think it can be emphasized enough the interest by EADS management in removing FR/DE control over the company, but given DE specifically has been moving in exactly the opposite direction, that was a conflict not destined to be resolved... offering a questionably justified merger is not enough to change Germany's fundamental interests, especially when smaller sectoral JVs can accomplish pretty much the same that a merger could)

I still think the whole event will precipitate further EU consolidation... with real sectoral logic, not just $$$ games...
That will certainly eventually involve EADS and BAE, likely with more productive pairings than this one.

[Snow Monkey]

Enders: EADS To Review Strategy; Cooperation With BAE Possible

EADS will study its options in the defense area as part of a review of group strategy, which may include military cooperation with BAE Systems, Chief Executive Tom Enders said Oct. 10 after the two companies said they were ending talks for a merger.

“We will need to review our Group strategy and defense activities in particular,” Enders wrote in a letter to EADS staff, a copy of which was obtained by Defense News. “However, one thing is already clear: There will be no turning back to where we started from, and that pertains not only to strategy.”

Enders pointed up the potential for cooperation with BAE in defense activities, stemming from good relations with the British company. (....)

[swerve]

As others have said its BAe's own fault it's in this mess. Like many British firms its had no strategy except going for the quick buck, ...

I wish I could say I disagree, but I can't. I think you've nailed it.

[Tu22m]

Anyways... the deal ist ovah!
http://www.svd.se/naringsliv/bransch...ar_7573584.svd

Merkel is the one to blame (according to the newspaper)

[Jō Asakura]

In some ways you could argue a repeat of the Airbus stake debacle has been avoided as BAE investors would not countenance a de facto buy out at such a low point in the firms fortunes. From Enders point of view, this was probably the right time @ the right price to facilitate his vision of a balanced civil-military portfolio by 2020. Surprisingly, it was the Germans who ultimately killed the deal, Merkel faces elections next year and Berlin is averse to EADS' shift in focus to arms exports.
Also the Germans feared EADS' plants in Bavaria would close and (particularly defence) production would be centred in France and the UK.

The French always dragged their feet on a significant national stake holding (provoking German calls for parity with France) and this would never be acceptable to the UK (and the US). I bet Dassault, Thales et al. breathed a huge sigh of relief! It will probably be years before a similar 'merger' is proposed again, and by that time the continental European defence firms will already have a nice slice of any future defence programmes. EADS shares rebounded strongly, whilst BAE's continued their two-week slide.

Investors notwithstanding, very bad for BAE though. To have lost out on major aerospace projects and find itself relegated to component supplier and bit-player in the ever decreasing US defence market, maybe a US merger is now on the cards?

Both Ian King and Dick Olver should heed the Sanskrit saying "Blessed is the man who has vision".

[charliehunt]

My first visit to MM, so I tread softly!! I read somewhere that the merger would have made a neat fit with the European Defence Force so greatly aspired to by the Europhile nations. For those of a more international persuasion that might not have been ideal. We still have considerable synergy with the US with the F35 to come and other programmes. And were Romney to win we might benefit from his commitmernt to increased defence expenditure. So on balance a good or a bad outcome?

[mrmalaya]

Surely BAE was moving towards the UCAV/UAV market as its aviation future (with government support and backing). EADS is not as advanced in that regard and has not had much success in new fixed wing military programmes beyond Airbus.

And obviously the BAE portfolio is not all about aviation (in fact far from it now).

I didn't see how this merger would have worked from that point of view, in fact it was a nightmare.

With the way the defence market is, BAE is going to have to look to the US or Europe.

I have heard consolidation with RR mentioned, but i don't know how that helps things particularly?

Is the general perception that a transatlantic deal would see BAE become an American company with less interest in UK sovereignty?

Surely its the case that the BAE/EADS concept only worked if it was to be allowed to function as a truly commercial proposition rather than a state sponsored arms supplier.

It is clear that Germany and France will not sign off on this type of deal, and does anyone in Westminster want the main UK arms supplier to become an entity that would ensure every procurement would be a Eurofighter type saga?

[mrmalaya]

Short story from Flightglobal:

http://www.flightglobal.com/news/art...-plans-377557/

and a longer summary of the likely position in the US from Aviation Week:

http://www.aviationweek.com/Article....505779.xml&p=1

[Snow Monkey]

Surely BAE was moving towards the UCAV/UAV market as its aviation future (with government support and backing). EADS is not as advanced in that regard and has not had much success in new fixed wing military programmes beyond Airbus.

sure, the dassault/bae cooperation would have certainly continued... with EADS owning bae, that takes off the pressure eads had been pushing for their own programmes, and germany could be brought on board thru BEADS.

I have heard consolidation with RR mentioned, but i don't know how that helps things particularly?

well, EADS never built engines, so i'm not sure why BEADS failing would prompt this...?
i suppose it has the same 'financial' logic with broadening cash flows beyond BAE's defense business,
but why would RR possibly want to involve itself in this transaction?
it may make sense for RR to buy certain activities from BAE, e.g engine auxiliaries, and other systems and controls, if they wanted to follow GE/Smiths,
but why merge with a naval and lands systems and EW company?

Is the general perception that a transatlantic deal would see BAE become an American company with less interest in UK sovereignty?

well then the question would be would the UK government be happy to see it's golden share go away? i don't see why they would. if the golden share transfers, it's more a matter of BAE 'taking over' any other company, from the UK government perspective. i don't see any big deals combining whole companies, there's plenty of scope for smaller consolidation with sectoral JVs. eads has said as much that such is still a possibilty with BAE.

Surely its the case that the BAE/EADS concept only worked if it was to be allowed to function as a truly commercial proposition rather than a state sponsored arms supplier.

why couldn't BEADS have functioned with similar shareholder rights as EADS? because enders doesn't like that? BAE holdings in the US have proxy boards just like EADS does... no difference there. if other BAE holdings were deemed 'sensitive', they could be placed under proxy as well, if it came to it.

and does anyone in Westminster want the main UK arms supplier to become an entity that would ensure every procurement would be a Eurofighter type saga?

why would that be the case? EADS or MBDA certainly pursue programmes ordered by only one country, even that heavily overlap programmes pursued by their divisions in other countries. for programmes equivalent to eurofighter, there is going to be a multinational program anyways regardless of the corporate alliances involved being under one roof or not.

[Sintra]

It is clear that Germany and France will not sign off on this type of deal, and does anyone in Westminster want the main UK arms supplier to become an entity that would ensure every procurement would be a Eurofighter type saga?

Exactly the oposite, a BEADS would allow the work to be done under one single entity, instead of four...
Think MBDA.

[swerve]

... and does anyone in Westminster want the main UK arms supplier to become an entity that would ensure every procurement would be a Eurofighter type saga?

You mean like CAMM, LFK NG, Aster Block 2, VL MICA, SPEAR, Fire Shadow, TiGER, MMP, MHT &, MdCN? And that's just MBDA products. If we consider other multinational European countries, such as Thales & EADS, we discover that they're all churning out national, & sometimes bi-national, projects. There are far more of them than there are Eurofighter-style multinational programmes.

And as Sintra says, having work done by a single firm is utterly different from the Eurofighter model. See FASGW(H)/ANL, for example: two countries, one company. No competition between different national firms for workshare.

[mrmalaya]

How is the government interference with MBDA?

I don't doubt (see my earlier posts) that a multinational company able to make its own decisions would be a positive thing. That doesn't appear to be what France or Germany wanted at this stage though does it?

[swerve]

EADS already has plenty of national & bi-national products. Why would that change? Why would it suddenly only be able to build Eurofighter-type multinational products?

No, this is an imaginary problem.