What Next for Aerospace Giant EADS?
(Source: Deutsche Welle German radio; published Oct. 11, 2012)
The merger with BAE Systems has failed as the British, French and Germans were unable to come to an agreement. Defense and aerospace giant EADS must now seek a new strategy for the future.

Fighter planes are out, passenger planes are in - at least in the European market. In cash-strapped times no European state would consider handing out huge sums for defense and military tools. The German government, itself an EADS customer of the Eurofighter among other purchases, is not seeking any major new contracts for the time being.

In search of growth for the defense sector, EADS had looked toward the US market, where its British counterpart BAE has been successful. EADS, formed in 2000 from the merger between the German Daimler Chrysler Aerospace, the French Aerospatiale Matra and the Spanish CASA, had been hoping to drum up new clientele with a merger with BAE.

Had the proposed fusion taken place, it would have resulted in the world's largest defense firm. The merger plans were made public in mid-September - and now after a few weeks of negotiations, those plans are already on the way to being forgotten.

Franco-German tug of war

"I wasn't surprised," said Sebastian Hein, a stock analyst and industry expert at Bankhaus Lampe. "The massive political resistance was ultimately too great to overcome."

Hein added that the project was too ambitious and the fact that political interference had such a big influence on a business deal was a serious hurdle. Through direct and indirect avenues, Germany and France possess slightly more than 22 percent of EADS shares.

"From an economic perspective, this should of course be avoided," said Klaus-Heiner Röhl, an economist at the Cologne Institute for Economic Research (IW). "Pure economic theory would say that the state should stay out of it and leave the market alone."

Keeping political influence out of defense equipment and national security, however, has proven impossible.

In the recent merger talks, it was shown once again how much the respective countries are fighting for a say. "The aviation industry reflects the lack of consensus on many other issues," said Röhl. "Ultimately, each state pursues its own interests. EADS is suspended in a perpetual tug of war between France and Germany."

Germany didn't trust guarantees

Criticism from the political classes followed the collapse of the merger, in particular regarding Peter Hintze, the German government's aerospace coordinator. Speaking to the German mass-market daily Bild, Hintze defended the attitude of the German side in the negotiations, describing it as being the "duty of the federal government to safeguard German interests - key technology and jobs."

But Röhl said to argue against a merger for those reasons is misguided. He said that as part of a merger, EADS and BAE would probably have been willing to guarantee that certain company locations would be based in Germany.

"But without this merger, these locations are significantly more at risk," he said, adding that fears France and England would call the shots in a merged company were likely behind the collapse of the deal.

Industry leader

With about 135,000 employees and sales of 49.1 billion euros ($63.5 billion) last year, EADS is one of the industry's major players. Its Airbus division has seen success with its passenger aircraft division, taking on US rival Boeing and its giant A380. However, Cassidian, EADS' defense division, is the weakest link in terms of long-term growth potential.

EADS head Tom Enders had been a driving force behind the merger plans, and now he wants to put the company's defense sector to the test. "I'm ready to admit that I did not expect such strong resistance to this merger, especially not from Berlin," he wrote in a letter to employees.

Focus on India?

"Brazil, India - these are countries that are increasingly becoming wealthier, and with more prosperity comes more security concerns," said Bankhaus Lampe's Hein. The security sector, for example border security, is an attractive and high-growth sector, and Hein said he thinks it offers EADS the possibility for a reorientation.

EADS is already supplying this growing market: 29 percent of its sales are being generated in Asia, and 10 percent in the Middle East. Latin America has also been identified as a "promising area" with "numerous opportunities" for sales and production. (ends)

The World from Berlin EADS-BAE Failure a Wasted Chance for Europe
(Source: Spiegel Online; published Oct. 11, 2012)
The failure of the massive merger of EADS and BAE shows more clearly than ever the degree to which politicians influence the European defense industry. The Continent missed a prime opportunity to fix the problem, argue German commentators.

With defense budgets being cut in Europe and in the United States, the EADS-BAE merger certainly would have made sense from a business point of view. Over several months of negotiations, however, it became clear that it was not politically palatable. The final nail in the coffin, driven in on Wednesday, had been just a matter of time for weeks.

Had it succeeded, the merger would have created an aerospace-defense giant, with up to €72 billion in annual sales and an international workforce of 220,000 employees. Its failure, however, says less about defense industry economics in 2012 than it does about the high hurdles facing tighter political and economic cooperation in Europe.

Ultimately, the deal failed because Germany, France and Britain could not agree about the level of state involvement in the post-merger company. Paris, which owns a minority stake in EADS, insisted on a similar stake in the new company. Berlin, which owns no direct stake in EADS but exerts control via German automaker Daimler's stake, insisted it have just as much influence as Paris. And Britain was skeptical of any state ownership at all. Instead of becoming a model for deeper European economic cooperation, the failed merger has become a warning of the significant role national interests still play in the European Union.

On Wednesday, Germany was the target of initial finger pointing. Berlin, it was said, backed out because it was concerned about being forced to share its leading role in technology and engineering with France and Britain. It shouldn't come as a surprise. Germany has long shown interest in exerting a greater role in EADS. Indeed, the state-owned KfW Bank will now take over Daimler's stake to shore up German government influence in the company.

German editorialists would have liked to see the trend move in the opposite direction, though. A prime opportunity was lost to remove some of the political influence over EADS, they write on Thursday.

Business daily Financial Times Deutschland writes:

"The strife focused primarily on where the company would be located, on power sharing and on national interests … . From the perspective of the companies involved, there were good arguments in favor of the merger. The two firms complement each other well, together they would have become a world leader with access to growth markets outside of Europe. But the last few weeks showed clearly what happens when too many governments want to have a say and influence the decision. That alone was enough of a concern. The new giant would have been a highly political entity. As such, it is good that the specter has passed."

Center-left daily Süddeutsche Zeitung writes:

"The disaster of the failed merger shows that EADS is still under state control to a greater degree than is generally obvious -- and to a greater degree than EADS CEO Thomas Enders wants people to believe. More than ever, management's hands are tied when it comes to significant strategic decisions. That is a mistake. The merger with BAE would have been an opportunity to leave such outdated structures behind."

Business daily Handelsblatt writes:

"The failure of the EADS-BAE merger means that an excellent chance to consolidate the European defense sector has been wasted. In the wake of such a debacle … who will venture a new attempt to bring together the fragmented sector under the roof of an industry giant? Nobody."

"Yet market consolidation is overdue. Almost every European country has its own defense sector. In Germany, for example, both Rheinmetall and Krauss-Maffei Wegmann build tanks. They have competitors in France, Italy, Spain, Sweden and Great Britain. Such a situation may guarantee innovation as a function of the difficult competition. But it is one thing above all else: expensive and inefficient. In good times, Europe could afford such a situation. But we are not living in those times."

Conservative daily Die Welt writes:

"It would have been good for continental Europe to combine its defense industry with that of Britain in order to better compete with the US. But instead of supporting the project, the German government became bogged down in questionable positions that made little sense. Why was it so important to have just as many shares as the French when such a minority ownership stake of 9 percent would not have included any special rights?"

"The great opportunity of partially depoliticizing EADS, as CEO Enders intended, has been wasted. There will be collateral damage." (ends)

Berlin Blasted for Ruined EADS-BAE Merger
(Source: The Local GE; published Oct. 12, 2012)
Germany was under fire, the European aerospace industry in search of a new future, and EU credibility undermined on Thursday with the failure of a merger by EADS and BAE Systems.

The fiasco was a huge blow to European ambitions because Germany, France and Britain were unable to seal the deal, and the immediate losers are the two companies, analysts and press comment stressed.

German newspapers blamed the government of Angela Merkel in Berlin for shooting the deal down and damaging the EU in a misguided drive to protect German jobs.

EADS is now faced with rethinking its strategy and BAE Systems faces tough options and could be taken over, some analysts said.

But the board of the European Aerospace Defence and Space Company (EADS) reaffirmed its support for chief executive Tom Enders on Thursday.

At BAE, chairman Dick Olver and chief executive Ian King said that despite the setback, the company remained "strong and financially robust" and looked "to the future with confidence."

Amid recriminations over who was to blame, French President Francois Hollande and German officials said the final decision had been taken by the firms. But analysts said the companies were left with no choice but abandoning the scheme with only hours left before a deadline under British merger rules.

EADS and BAE Systems were salvaging what they could from the end of their merger strategy, but the collapse of negotiations on Tuesday raised far bigger questions about how EU governments work together.

These were highlighted by excoriating comment in German newspapers which described the failure, widely blamed on Germany, as a "disaster" and a big blow to the "European dream."

The mass circulation Bild accused the German government of "lacking courage" and damaging the European Union. Germany had "missed an opportunity," it said.

The business paper Handelsblatt was more direct, referring to "the end of the European dream."

And Süddeutsche Zeitung declared that Merkel's ministers "took the wrong road in wanting to control EADS."

It said: "The defence of German jobs is not determined by a state's shareholding but by the success of its products and its competitiveness." The failure of the deal was a "disaster".

Elections take place next year in Bavaria, where EADS has substantial activities and then Merkel faces national elections. The risk that voters would have seen a merger as a threat to jobs is believed to have weighed heavily with Merkel.

In France by contrast, Hollande is in his first year as president. But he is struggling in the polls against a perception that his administration is weak at home and playing number two to Germany in the eurozone debt crisis.

France is believed to have made a big and untypical concession to Britain by agreeing to limit its shareholding.

Experts in European defence said that abandonment of the attempt to create the biggest aerospace group in the world was mainly a political failure. But it would not stop consolidation of European defence industries, ever more necessary because of pressure on defence budgets.

'We could not push on'

"It is not a good sign for Europe's defence industry because the three countries that really count could not find a way to agree," said Jean-Pierre Maulny, deputy director of the Institute for Strategic and International Relations in Paris.

At the Carnegie Europe think tank, director Jan Techau said that the merger should have been "a demonstration of the shared ambition" on European defence between France, Germany and Britain, but had shown the opposite.

The director for strategy and marketing at EADS, Marwan Lahoud, said the collapse of the deal opened new possibilities for the group which is based mainly on the Airbus airliner maker.

But BAE Systems issued a cautious statement talking of "modest growth" and confirmed its profit outlook amid "uncertainty" over cuts in defence spending in the United States where the firm does about 45 percent of its business.

Lahoud told Les Echos newspaper: "There is more of a future for a group like EADS," and failure of the deal should push the company to "reopen the field of possibilities."

He said that a "formidable opportunity has just been missed" but the group had a clear strategy for diversifying geographically and in terms of industrial activities.

The two firms had been unable to convince Germany of the strategic value of the deal or that Germany's interest would not be diluted, he revealed.

"In reality, there were never any negotiations with them," he said. "From the moment that the (German) government said no, we could not push on."

Some analysts had warned that Germany feared being sidelined, with the heart of airliner maker Airbus being settled firmly in Toulouse, southern France and the hub of the defence activities going to London where BAE Systems is based.

For all three governments the tie-up raised difficult issues of prestige, national security, plant closures and job cuts.

On Thursday, EADS shares traded 0.90 percent lower in Paris, a day after jumping more than five percent. BAE Systems shares jumped 2.4 percent in London.


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