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EADS: Holding Company or Integrated Group? |
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(Source: defense-aerospace.com; published June 23, 2006)
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By Giovanni de Briganti
PARIS --- The drama that has unfolded at EADS since July 13, when it announced an additional six-month delivery delay for its new A380 superjumbo and issued a surprise profit warning, has primarily focused on the financial consequences, which range from revenue shortfalls to allegations of insider trading, to the financial penalties that will be demanded by customer airlines.
Attention has also focused on management performance and claims of continued infighting between French and German shareholders and managers that is said to be hobbling the company at a difficult time in its development.
Ongoing consultations between shareholders, at the behest of the French government, are concentrating on improving corporate governance, updating the shareholder pact, finding ways to restore investor and customer credibility and, not least, to resolving the complex industrial problems that are the cause of the A380’s production and delivery delays.
These are certainly crucial issues that require quick and effective solutions, but a number of industry insiders believe they may hide a more fundamental question.
One school of thought traces most of the problems that have now surfaced at the French-German group back to the time when EADS, which was essentially a financial holding company, gradually began to get involved in the management of its subsidiaries’ operations. This, the argument goes, gradually diluted the authority and autonomy of business unit managers and confused lines of responsibility, but fell well short of effectively transferring operational control to group headquarters. The resulting uncertainty loosened management authority and, imperceptibly, led to an environment where day-to-day operations were not sufficiently monitored.
Another school of thought instead blames EADS’ primary focus on financial performance and profitability, which replaced the engineering and industrial culture that had dominated its heritage companies for decades. The corporate requirement that business units generate high returns on capital – some say at least 10% to 13% -- is singled out by some insiders as proof that managers were given targets that were too financial and insufficiently industrial in nature.
Whether or not these observations are true, it is a fact that all of EADS business units pre-existed the company’s creation in 2000, and that business units as diverse as helicopter maker Eurocopter, satellite producer Astrium, and Airbus all were leaders in their fields before they were brought under the EADS umbrella.
EADS’ principal justification as a corporate entity is to be the investment proxy for its business units which, otherwise, would be too vulnerable to the cyclical nature of the defense and aerospace industries to attract investors. EADS can also offer its business units a range of corporate services (access to finance, to an international marketing network, corporate alliances, basic R&D, etc.) that they would find too costly to finance alone, or which would be wastefully duplicative if they did.
The case for EADS’ involvement in the operational management of its business units, which operate in very diverse industries and markets, is less obvious. These units often have little in common, and some observers question whether EADS corporate managers can – or indeed should -- provide the know-how and input that might enhance subsidiaries’ effectiveness without stifling their own top management.
EADS corporate managers are thus doomed to tread the very thin line that divides a holding company from an industrial conglomerate, and run the constant risk of leaning too far one way or another and cancelling the advantages they otherwise bring to the table.
Beyond all the other issues now being discussed, the main question that must be answered is whether EADS should be a holding or an operating company. All remedial actions now being debated, including a mooted reorganisation and a possible merger between EADS and Airbus, can only be decided once shareholders have answered this essential question.
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