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BAE-EADS MEREGER ONE YEAR ON

BAE-EADS MEREGER ONE YEAR ON – MISSION ACCOMPLISHED
By Giovanni de Briganti

17 Sep 13. Nearly a year after BAE Systems and EADS first acknowledged they were discussing a merger, and eleven months after the merger was finally blocked by Germany, reality has disproved many, if not most, of the arguments put forward by its
supporters.

At the time, conventional wisdom held that EADS could not survive on Airbus civil sales alone, while interference from the French, German and Spanish governments was sure to force bad managerial choices that would ultimately prove fatal. Furthermore, the company’s lackadaisical dividends policy would increasingly rebuff potential investors and shareholders alike.

The merger with BAE was designed to fix these seemingly intractable problems, so its failure at the behest of German chancellor Angela Merkel was denounced by its backers as an industrial catastrophe that would cripple Europe’s largest aerospace and defense company.

The paradox is that, one year on, EADS has achieved most of what it wanted to achieve, without having to go through the merger. Conversely, it has since become clear that a merger would not have fixed BAE’s problems, which are getting worse as its excessive dependence on Saudi Arabia highlights its long-term vulnerability.

And it also has become clear that the doomsday scenarios brandished to support the merger were little more than guess-work, hyperbole or scare-mongering, with little or no foundation in fact.

Unavowed goals

Tongues have loosened over the past year, and it is now openly acknowledged by insiders and observers that, for EADS, the merger with BAE was a way to cut loose from excessive oversight from three governments; to win the freedom to run the group as a private company capable of competing on an even field with the biggest aerospace and defense players in the world; and to deal with its shareholders as it wished.

While much of what was true in Sept. 2012 remains true in Sept. 2013, most of these goals have been achieved, and EADS’ status and governance has been turned upside down, without a merger.

EADS management, led by CEO Tom Enders, has managed to reduce the shareholdings held by the French, German and Spanish states to less than a blocking minority. A year ago, in the summer of 2012, the French government and the German government, directly or indirectly, each controlled 22.35% of EADS shares, while Spain’s state holding company, SEPI, held 5.5%, giving the three governments an absolute majority of 50.2%. A shareholder pact ensured they would act in concert to protect their vital interests.

The new governance rules pushed through by Enders have changed all that. As of June 30, 2013, the stake controlled by the French government had been reduced to 11.96%, Germany’s share was down to 10.69% and the Spanish state’s to 4.12%; together, the three governments now control only 26.7% of the shares and 27% of the votes – not even a blocking minority – and their shareholder pact has been dissolved, although they can still together veto some operations, such as a hostile takeover.

Enders also has consolidated his hold on the company by renewing the board, by reshuffling top management, and by launching an expensive share buy-back plan to boost shareholder returns. He has spent €6.3 billion of EADS’ €12.2 billion cash pile since December 2012, and tightened his hold on the company to the point that it will now change its name to Airbus, just as he had proposed a few years ago. And corporate headquarters are now in Toulouse, as we wanted, instead of being split between Paris and Munich.

None of this would have been possible pre-merger, and it is remarkable that these radical changes in corporate governance went through without a whisper of complaint from shareholders, governments, analysts and the media, giving the impression that Enders somehow managed to hypnotize stakeholders.

The contrast is all the more stu

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