For decades now, following the Second World War, the issue of national security has always been taken with utmost caution and priority. This is what basically led to the establishment of various arms manufacturing companies among the first world nations. The growth in technology saw it through another era of missiles, drones and fighter defense aircrafts which contributed greatly to the speed, accuracy and impact of the defense ammunition. “Efforts by the European governments to shape the structure of their aeronautics industries have been aimed at consolidation and international collaboration since the end of [WW] II.” GAO (1994) p. 4
However, this is a highly expensive venture and its budget is sometimes even too high for some countries to support single-handedly. The continuous evolution of the business arena and changes in the consumer needs therefore led to the birth of mergers whereby, a number of countries or companies would join arms and combine incomes to support the funding much easily. The same could also occur among countries occupying a close geographical area (Brian, 1997).
In retrospect, merger refers to an aspect of corporate strategy and corporate management whereby there is combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. The two companies then unite to become one entity. The two companies however have to be willing to get into the venture.
The United States was the first country to restructure and consolidate its aerospace and defense sector in response to the new post Cold War environment. In achieving this status, sharp cuts in national spending were made and the funds siphoned into this defense sector. In doing so, Washington embraced a consolidation approach which is simply one that regards the retention of American control and ownership over key companies such as Boeing and McDonnell Douglas Corporation (MDC) as paramount to national security considerations. This ethnocentric approach to the aerospace and defense industry consolidation is fully in line with the key tenets of realism, which would posits that sovereign, independent states will try to prevent strategic companies and entire industries of critical importance to their national security and survival from coming under full or even partial foreign control.
The merger between BAE systems and EADS was the last chance of creating a European aerospace and defense giant. However, following the collapse of the talks, all hopes of having a consolidated British Multinational defense, security and aerospace institution seem to have been lost.
Initially, the entire idea of a merger formation was conceived by one of the BAE managers with the aim of creating an entity with more balanced commercial and military operations, who has since then been under pressure to resign (Milmo, Treanor, Conolly & Wilsher, 2012)
It was to be among Britain, France and Germany. In the UK, there existed about 70 different aircraft and aircraft engine manufacturers at the end of the Second World War. By the early 1960s, numerous bankruptcies had consolidated the UK aerospace industry into just two major players: Hawker Siddeley and BAC. The UK’s effort to create the country’s national aerospace and defense champion occurred in 1977, when London nationalized Hawker Siddeley and BAC to create BAe (British Aerospace). In 1981, the Thatcher government partially privatized BAe and sold a 51.57 percent stake in the company, before shedding its remaining shares in 1985. To this day, however, London retains substantial share in BAE to retain control over the company’s strategic decisions. The Golden Shares give the British government important rights, including “UK citizenship requirements for the companies’ boards of directors; control over the percentage of foreign owned shares [usually limited to 15 percent]; and approval requirements for the dissolution or disposal of any strategic assets.” Bialos (2009) vol. II, p. 612
France had a far more vertically integrated aerospace industry than any other European country with market leaders in civil and military engines and avionics, weaponry, aerostructures, and other subcomponents. While Germany had the world’s most advanced aeronautics industry at the end of the Second World War, West Germany was not allowed any aeronautics and defense production capacities until 1955. Afterwards, many of the often family owned aeronautics companies entered the aircraft business . In the 1960s, the West German government pushed for aerospace industry consolidation, threatening to withhold any future federal defense procurement contracts from those companies opposed to industry consolidation. The strategy worked and by the end of the decade the number of major German aeronautics companies had been reduced to four. It was therefore quite evident that they would not hold much control in the proposed merger which posed a threat to them. GAO (1994) pp. 40– 31 and Milosch (2006) pp. 132-135
Returns to Bidding
BAE systems ( Brough Advanced Engineering and Manufacturing Service) is one of the world’s largest defense contractors that also plays the role of a supplier to the US Department of Defense. It owns a 20% share of Airbus. EADs (European Aeronautic Defense and Space Company) on the other hand owns an 80% share of Airbus. The merger was aimed at restructuring the European aerospace and defense industry by consolidating it through a joint effort by several countries. The concerned stockholders were; Britain, France and Germany. It would be worth 72 billion pounds and would also carry 220,000 employees with it (Milmo, Treanor, Conolly & Wilsher, 2012). These figures seemed quite substantial against their main competitor Boeing of Michigan US which is worth 53.2 billion pounds.
Following the announcement of the merger, BAE since then begun to receive attractive bids from the United States.
Target Companies during Merger Bid
On 12th September, when the intent of a merger was announced, whereby two companies namely; BAE and EADs were to enter into a partnership that would merge the entire defense, security and aerospace throughout Britain and reduce the individual countries to a single continent based unit. In the stakes of the proposed merger, BAE was to own 40% of the shares and EADs was to own 60%, BAE expressed some concern over their smaller percentage.
BAE was formed on 30 November 1999 by the 7.7 billion pounds merger of two British companies; Marconi Electronic Systems (MES); which is the defense electronics and naval shipbuilding subsidiary of the General Electric Company (GEC), and British Aerospace (BAe) – which is an aircraft, munitions and naval systems manufacturer (Milmo, Treanor, Conolly & Wilsher, 2012).
Stock Returns for BAE or EADS during the Bid
EADS shareholders mainly expressed relief at the collapse of the deal, fearing for their investment as it ventured into a declining consolidated defense market. EADS shares rose 5.29 percent on, while BAE shares fell 1.38 percent.
The merger’s failure is however a setback for EADS boss Tom Enders, who had hoped the merger would dilute the political control that Berlin and Paris exert over his firm.
How Investors Reacted on Major Dates
On 1st October, Lagardere, a major EADs shareholder urged the Franco-German industrial group to re-examine the terms. This followed an expression of France’s interest to buy the Lagandre’s stake which was not taken well by the British side as they wanted to limit the influence of Germany and France by ensuring that their stake remains below 10%
On 8th October, BAE’s largest shareholder with 13.3%; Invesco Perpetual went public with its concerns over the possibility of the merger jeopardizing their strong connection to the US. They also expressed concern over their employees since it was projected that those to incur the greatest loss would be the BAE employees. They further said that it could not see the rationale for the merger between Britain’s biggest defense contractor and the owner of Airbus. There was no reason other than diversification, which investors could achieve on their own and more cheaply and simply. They did not understand the strategic logic for the proposed combination.
Possible Reasons for Changes in Price on Key Dates
The existence of an extremely close and complex relationship with weapons manufacturers made the merger appear as posing a threat to the participating countries. This discouraged some countries since it caused a degree of uncertainty. On 13th September, the UK defense secretary demanded assurances that it would not compromise national security.
Close links of the two companies to political parties also contributed to it since it affords them proximity to those at the apex of power. This was a major contributor to the political obstacles from the French and German government on 16th and 17th September. The British government appeared to have more control.
Unions also raised concerns over possible threats placed on the job cuts that would be faced by those already working in the concerned companies. They did so on 13th September. This facilitated a reaction by the EADs chief; Tom Enders who reassured them of their jobs (Sunday Sentinel, 2012).
Germany also contributed largely to the collapse of the talks. Through Ms Angela Merkel, PLC, German Chancellor felt that the deal’s negatives outweighed its benefits for her country. This came on 26th September as they threatened to block the merger. The fact that Germany had no direct stake in EADs also weakened their confidence in the deal as it was seen as a sort of disadvantage to them in comparison to other countries belonging in the same region. French owned 15% while Spain had 5.5%. However, German car giant Daimler owned 15%. It also feared being marginalized by France and Britain which have larger aerospace and defense industries once they had ventured into a partnership.
Being a monopoly, the companies could not face legal action even when faced with corruption allegations. This therefore leaves their integrity in a questionable position. This was on 4th October when anti-corruption group came forward and warned that the merger could produce a company too large to prosecute.
Finally, all the three countries were unable to put their national interests aside since they wanted to protect their jobs and industrial sites. France wanted to retain their amount of shares while Britain wanted to reduce the degree of political influence. This eventually led to the final collapse of the talks on 10th October when all the three countries failed to come to an agreement.
References
Brian C., (1997). US May Retaliate if EU Rejects Boeing Merger, Wall Street Journal, 18th July 1997, pg A2.
Milmo D., Treanor J., Conolly K,. & Willsher K., (2012). BAE &EADs Fight to Keep Proposed Merger on Track, The Guardian, Monday 8th October 2012.
Michaels D., Gauthier D., Cimilluca D.& Walker M, (2012), Government Discord Derails Massive European Merger, The Wall Street Journal, 10th October 2012.
Gao, (1994). European Aeronautics: Strong Government Presence in Industry Structure and Research and Development Support. AD-A279 220.
Sunday Sentinel, (2012). EADS, BAE Shares sag as doubts emerge about merger 2012-09-13 retrieved from: http://article.wn.com/view/2012/09/13/EADS_BAE_shares_sag_as_doubts_emerge_about_merger_7/#/related_news
