The European Aeronautic Defence and Space Co. (EADS) and Britain’s BAE Systems called off their planned $94 billion merger saying that while the deal made strong business sense, the British, French and German governments couldn’t come to terms with each other nor with the reasoning behind the deal.
BAE is focused on returns to its shareholders, “a business approach that the governments of France and Germany weren’t quite prepared to sign up for, and it explains why some big shareholders in BAE Systems had begun to express public reservations about the proposed merger,” Loren Thompson, who runs the advisory firm The Lexington Institute and counts BAE among his clients, wrote an online version of Forbes recently.
The collapse of the merger negotiations, while not unexpected given the strong government interests involved with both companies, leaves the status quo intact on the aerospace and defense industry landscape, at least for now.
So what’s next? When the merger was first announced last month, industry heads and analysts believed that if the United States government blessed the combination of EADS and BAE, which does about half of its $30 billion in annual sales in the United States, then it might not stand in the way of mergers between major defense companies here. That’s because the United States is likely headed for a period of constrained defense spending due to fiscal concerns.
Thompson believes that BAE’s management may be interested in pursuing a “strategic combination” in the United States with a major defense contractor to further expand its presence here as long as it doesn’t hinder returns to its shareholders.
One industry official suggested that a diversified manufacturer in the United States that already has a defense business may be interested in BAE, at least for its U.S.-based operations.
But, Byron Callan, an aerospace and defense analyst with Capital Alpha Partners, said in a note recently that with the plug pulled on the EADS and BAE marriage, “there may be less appetite in the DoD to see mergers among large U.S. defense primes, though views could change depending on the budget in 2013-2015 and who wins the November election in the U.S.” He noted that a large restructuring within the defense industry remains a “theme” in the sector going forward.
Since the late 1990s, BAE has successfully acquired a number of different-sized assets in the United States, primarily focused on defense, and Callan believes the company’s consumption of mid- and small-size U.S. defense firms may continue for the next few years.
EADS has also had its sights on the U.S. defense and security market for years but has only done several acquisitions to expand its presence here.
Callan said that given how difficult it was to balance government interests in the failed EADS, BAE merger that it is difficult to see how a large merger between European aerospace and defense firms could happen in the future.