BAE + EADS = A Big Deal

This time last week, a team of Europe’s leading golfers were well on the way to a stunning comeback win over their US counterparts, on the same American soil on which most of the team ply their trade each week. The victory owed much to a golden generation of British players, but was ultimately both inspired and driven by two of the sport’s continental legends.

The same sort of triumph of European co-operation over American might is what the bosses of EADS and BAE Systems had in mind when they proposed a merger of the two companies that would form a defence and aviation behemoth to rival Boeing.

As with the golf, also, the coup would take place under the noses of the Americans, with whom BAE in particular conducts a substantial amount of business. Where the similarities end is in the wave of both healthy scepticism and downright nationalistic fear-mongering that has greeted the announcement.

With a common history of state ownership, shared importance in matters of national and international security, billions of pounds in respective annual profits and an unshakeable symbolism of European unity and British aloofness, these two firms know that any major business decision they take is sure to be politically significant and sensitive.

When the merger plan was leaked to the media last month, right-wing rags wasted no time in impressing upon their readers just how much of a bad idea this was – warning of “the dangers of foreign ownership”, questioning the implications for BAE’s contracts with the US and Saudi Arabia, and raising the spectre of job cuts required by a streamlined multinational organisation.

Above all, though, it is the prospect of 60% foreign ownership that spooks those who already harbour deep suspicions of anything said or done by anyone from across the Channel. But this arrangement is not unreasonable – BAE is held at arm’s length by one national government, while EADS is under the influence of three; and although the two companies’ profits are similar, the continental firm generates two and a half times the revenue of its British rival.

Then again, they aren’t really rivals at all – BAE is the world’s second biggest defence contractor, whereas EADS’s main business is in civil aviation through its Airbus subsidiary. Both are locked in perennial competition with American giants, and both have much to gain from joining forces, sharing expertise, growing networks and cutting costs.

From a business point of view, then, the merger is a good deal – and an especially good deal for BAE, whose share price has been stable since the news broke, while EADS has lost a sixth of its market value.

The politics, however, is much less clear-cut. The British government has pledged to use the ‘golden share’ it holds in BAE Systems to veto the merger if it is deemed not to be in the UK’s best interests, while the French and Germans are also reluctant to let go of their stake in EADS; such political resistance from either side remains the biggest threat to the deal going through.

In the end, though, it may well be the US itself that plays the key role in determining whether the merger goes ahead. If France and Germany insist on retaining too much control of the new company, Washington could threaten to turn its back on Europe altogether when it comes to awarding lucrative but sensitive contracts in future.

It would be even worse for EADS if the deal falls through. BAE has shown its hand in declaring its desire for a strategic partner, and the open goal offered up by a failed merger is unlikely to be missed by an American giant such as Lockheed even Boeing itself. Such a deal would reinforce America’s superiority, and Europe’s irrelevance, in global defence.

At the heart of this proposition is the business interests of the firms involved, but fears over the potential political ramifications have raised the stakes. As ever, the irony is that it is that same political interference that could scupper the deal – or worse, produce a fudge that suits nobody.